Land Transaction Tax reform could revive the private rented sector in Wales
Amidst a housing emergency, with demand for private rented homes outstripping supply and nearly 12,000 individuals across Wales in temporary accommodation, the NRLA has called pro-growth measures to boost the supply of private rented homes, including reform of Land Transaction Tax (LTT).
PRS is a vital part of the housing market
The private rented sector (PRS) in Wales is an essential component of the housing market, providing homes for around 14% of households. But if provision of much-needed homes was not enough, research commissioned by the NRLA and Paragon Bank shows that small and medium-sized landlords (those who own fewer than fifteen properties) contribute significantly to the economy, adding £1.6 billion in Gross Value Added (GVA) and supporting 14,000 jobs in sectors like construction and financial services. Despite its vital importance, the PRS faces numerous challenges that threaten its growth, but the Welsh Government has a lever that could boost investment and encourage landlords into the sector – Land Transaction Tax (LTT).
Impact of LTT on PRS investment
The introduction of the surcharge on purchases of additional dwellings in 2016 – when Wales was still subject to Stamp Duty Land Tax (SDLT) – has had a profound effect on investment in the PRS. Analysis by Paragon Bank highlights the policy’s effect on borrowing, which “had the greatest impact on regional borrowing behaviour in the sector’s history”. Some will say this is evidence of a policy working as intended – the higher rate was introduced to catch PRS investors not caught by changes to mortgage interest relief (MIR) and to dampen investment in the PRS – but nearly a decade later, the supply and demand imbalance in the PRS cannot be ignored, and the tax requires urgent reform.
The PRS has grown significantly in Wales, with the number of households in the sector increasing by 44,000 in the decade to 2021, compared to a rise of just 7,000 in the social sector. Despite this growth, demand still outstrips supply and scarcity of homes coupled with escalating costs has seen average rents in Wales rise by 9.5% in the year to April 2024. Last year, Wrexham had the highest demand for private rented homes in Great Britain, with 56 prospective applicants per property, having risen from eight in 2019.
Yet, in 19 out of 22 local authorities, the number of PRS properties registered on Rent Smart Wales has decreased by an average of 302 since June 2021. A survey commissioned by the NRLA earlier this year reveals that thirteen times as many landlords in Wales plan to reduce their portfolios as expand them, suggesting that the imbalance between supply and demand is likely to continue.
‘Levelling the playing field’ is not enough
Currently, purchases of additional properties – whether for long-term rental in the PRS or short-term holiday let sector – are subject to a 4% LTT levy. However, amidst a housing emergency, it is not right that the provision of long-term homes in the PRS should be subject to the same punitive measures as holiday lets. The Welsh Government has recognised the need to tackle the problems associated with increased investment in the short-term holiday let sector and is adopting measures to ‘level the playing field’ with the PRS. However, deterrents on investment in holiday lets – such as a registration and licensing scheme and proposals to require planning permission for changes of use – must be matched with ‘positive’ interventions to promote the PRS and encourage landlords into the sector.
Analysis carried out for the NRLA in England shows that an additional 900,000 homes could be supplied in the PRS over the next decade if the higher rate of SDLT was removed – boosting the number of homes available for long-term rent as well as income and corporation tax receipts. The study demonstrates that over one third of landlords would increase the size of their portfolio in response to removal of the levy – of these, one quarter were planning to reduce their portfolio.
The Phase 1 evaluation of Leasing Scheme Wales flags local authority concerns over dwindling availability of homes in the PRS and warns of shrinking portfolios. The NRLA is therefore calling on the Welsh Government to reform LTT to help prevent further losses and revitalise investment.
