Radical plans to hand tenants the legal right to buy their rented homes at a knock-down price were tabled over the weekend by Shadow Chancellor John McDonnell.
Modelled on Margaret Thatcher’s 1980s policy giving social tenants the right to buy their council homes, McDonnell’s version would see private tenants handed the right to buy their home from their landlord at a discount.
The mooted plans were high level and lacked detail. Would landlords be compelled to sell and, if so, would they be forced to foot the bill for the discount?
So how could a buy-to-let Right to Buy scheme potentially work? We take a look.
Shadow Chancellor John McDonnell has proposed ‘Right to Buy’ for the private rented sector
What is Right to Buy and what is Labour proposing?
In an interview with the Financial Times, McDonnell said he wanted to tackle the ‘burgeoning buy-to-let market’ by giving private renters the right to purchase their property from their landlord at a discount.
The suggestion is a twist on Margaret Thatcher’s flagship Right to Buy policy, which in 1980 gave council tenants the right to buy their council house at a large discount from their local authority.
It has been controversial because while it introduced many families to home ownership, the properties that were sold off were not replaced and over the years there has been a substantial decline in the stock of local authority housing for rent.
In 2014, the Conservatives under David Cameron proposed to extend the Right to Buy scheme to those renting from housing associations.
A pilot was carried out in the Midlands. At the time, the Government proposed forcing councils to sell off their most valuable housing stock to compensate housing associations for the discounts they would need to absorb. This scheme is still ongoing and will complete next year.
With McDonnell’s plan, the difference is that this right would be extended beyond social tenancies to private ones and beyond housing associations to Britain’s army of private landlords – many of whom invested in buy-to-let to supplement their pension incomes.
Labour leader Jeremy Corbyn originally floated the idea in his 2015 leadership bid but it was never adopted as official party policy.
Corbyn said at the time: ‘We know that generation rent faces an uphill struggle simply to get into long-term housing… so why not go with Right to Buy, with the same discounts as offered by way of subsidised mortgage rates, but for private tenants.
‘I believe this idea could open up the possibility of real secure housing for many currently faced with insecurity and high rents.’
The official Right to Buy discount is up to 35 per cent and restrictions involve how long people have lived in a property and repaying all or some of the discount when selling it on.
Who would pay for the discount on market value?
The key to Right to Buy is the discount on the market value. It is not clear who would be expected to foot the bill for discounts on buy-to-let homes sold to tenants.
In 2015, Corbyn suggested using the £14billion of tax allowances given to landlords at the time to subsidise discounts on purchase prices if they sold up.
This would have allowed buyers to purchase their private home at the same discount as they would a council home without leaving the landlord out of pocket.
This would ultimately have meant landlords footed the bill for discounts, as they lost a tax break elsewhere.
These tax allowances have since been scaled back, meaning that this funding method would no longer be viable. In any case, subsidising a project of this scale would likely cost a lot more than the £14billion cited by Corbyn.
The proposals would extend Right to Buy to beyond council and housing authority tenants
Currently, Right to Buy extends a 35 per cent discount to tenants who have lived in their council house for between three and five years.
After five years this discount rises by 1 per cent every extra year up to a maximum of 70 per cent, or £82,800, whichever of the two figures is lower.
In London this discount cap is slightly higher to account for house prices, at £110,500.
If you live in a council flat the discount automatically starts at 50 per cent if you’ve lived there between three and five years, rising 2 per cent every year afterwards up to 70 per cent, or up to £82,800 or £110,500 in London.
I don’t think it’s complicated – John McDonnell
Using the lower £82,800 figure, this means that across the UK’s 4.5 million rented homes there could be a total £373billion discount awaiting tenants looking to buy their rented homes.
Of course, not all tenants will have lived in their property for more than three years, and so wouldn’t be immediately eligible for the discount – but the size of the sector means that to apply the same discount would cost either landlords or the state a lot more than £14billion.
Those who have bought through Right to Buy have restrictions on resale. Sell within a year and the whole discount must be repaid, within five years some of it must be.
Those who sell within 10 years must first offer the property to either to their old landlord or another social landlord in the area, explains the Homeowners Alliance.
How much money could buyers get off?
McDonnell was not clear whether a Labour government would subsidise the purchases. He also didn’t confirm whether or not the discount would be set at the same level as council homes.
‘You’d want to establish what a reasonable price is, you can establish that and then that becomes the Right to Buy,’ he told the FT. ‘[The Government] sets the criteria. I don’t think it’s complicated.
‘We’ve got a large number of landlords who are not maintaining these properties and are causing overcrowding and problems.
‘In my street now… a third of the houses are right-to-buy [sic], badly maintained, overcrowded. It’s horrendous.’
An investigation by MailOnline today indicated that neighbours felt McDonnell was exaggerating the state of his road.
The concept of a ‘Help to Sell’ policy to encourage landlords to sell to their tenants has been suggested by multiple think tanks over the years
Have ‘Help to Sell’ ideas been suggested before?
The idea of encouraging landlords to sell to their tenants has also been put forward as mutually beneficial for buy-to-let investors and renters.
The concept of a ‘Help to Sell’ policy has been floated by multiple think tanks and trade bodies over the years and even Conservative government ministers have flirted with the idea.
For example, last year a report from think tank Onward proposed a capital gains tax break for landlords selling to long-term tenants.
It suggested that the gain from the tax relief should be split evenly between landlord and tenant – giving the landlord a windfall and the tenant a sum towards their deposit.
At the time, the Treasury was reportedly taking the proposals seriously, but the policy never came to fruition.
Another think tank, the Centre for Policy Studies, proposed a similar policy last year.
However, while it attempts to address the same problem, the solution Labour is proposing is radically different.
Robert Colvile, director of the Centre for Policy Studies, said: ‘[Labour] seem to have completely missed the point.
‘The big story of the housing market in recent years has been a surge in private rental at expense of owner-occupation. It is vitally important to reverse that – for example by incentivising landlords to sell to tenants through tax reliefs.
‘But it is equally vital that this is done in a way that is fair – to tenant and landlord alike.
‘Labour’s proposed Right to Buy for private tenants appears in effect, to be the expropriation of private property, and is likely to have all kinds of unintended consequences.’
A spokesman for the Residential Landlords Association said: ‘The RLA is concerned that Labour’s proposals could be in breach of the European Convention of Human Rights if they were ever enacted.’
Has this been tried anywhere else?
While the requisition of private property may seem more possible in Venezuela or the former Soviet Union than the UK, there is precedent for it closer to home.
In 2016 Scotland introduced legislation which gives communities the right to buy and take over land and buildings from landowners.
Certain facets of this Act allow Scottish Ministers to compel landowners to sell property to community groups – for example, if ministers think the sale will enable ‘sustainable development’ in the area.
However, in most cases the seller has to be willing and can not be compelled to sell by the State – the right to buy is triggered when the landowner puts the land up for sale.
The idea was originally floated by Jeremy Corbyn in his 2015 Labour Party leadership bid
While he didn’t specify whether or not this would be the case under his new policy, McDonnell’s suggestion that it would be an extension of Right to Buy, in which all qualifying tenants can buy, implies that under Labour landlords could be compelled to sell to their tenants even when they would rather keep their properties themselves.
The Centre for Policy Studies’s James Haywood said: ‘John McDonnell has said that the government would decide what was a ‘reasonable price’ for the property – this appears to not be the market price.
‘Owners would be forced to sell their properties for significantly less than what they are worth – and it is unclear that landlords would be adequately compensated.
‘This would be an unprecedented breach of property rights. Some mechanisms do exist within the law to force property owners to sell, such as Compulsory Purchase Orders used by councils or national government and ‘Community Right to Buy’ rules in Scotland, but in both cases the market value is paid and many other criteria must be met.
‘Such a policy appears to have no precedent in any developed country in recent years.’
Ryan Prince, founder of property investor Uncle UK, said: ‘McDonnell’s announcement is tantamount to expropriation at punitive prices. This is anathema to what the UK stands for as a country and society.
‘This policy would have dramatic implications for all forms of investment capital – foreign, domestic, institutional and individual. People have worked for years to buy a flat as an income-generating investment their retirement. This policy would rob them of their assets.’
What could be the knock-on effect for rental homes?
Buy-to-let investors are already feeling the squeeze with a 3 per cent stamp duty surcharge on buying properties and a tax hit on rental income.
For years, landlords could deduct their mortgage interest from their rental income before calculating how much income tax they had to pay.
They were also entitled to tax relief at the rate at which they paid income tax on these profits – in some cases up to 45 per cent.
Capital gains tax
Any profit made on an investment property is subject to capital gains tax when it’s sold.
For landlords this means they can expect to be taxed on the difference between the price they bought a property and the price they sold it for.
Everyone has a capital gains allowance of £12,000 a year. But on any profit above that, a basic-rate taxpayer would have to pay 18 per cent in tax on the gain. A higher-rate taxpayer would have to pay 28 per cent on the gain.
But former Chancellor George Osborne began phasing this tax relief out in 2016 and from April next year it will be scrapped entirely, to be replaced with a 20 per cent tax credit.
This was the tax relief Corbyn originally said should be scrapped to subsidise Right to Buy discounts on private rented property.
This tax credit could potentially be in Labour’s cross hairs if they still wish to target landlords as a way to subsidise discounts.
There would be other issues facing landlords, even if the discount was subsidised another way.
McDonnell made no mention of a possible capital gains tax exemption in his interview, meaning if landlords were forced to sell, they would be hit with a double whammy.
David Smith, policy director at the RLA, warns the move would ‘kill off’ large sections of the private rented sector
For these reasons landlord trade bodies have warned that if implemented the policy would kill off a ‘large part of the sector’.
David Smith, policy director for the Residential Landlords Association, said: ‘If there was to be any chance of this becoming law, there would be a mass sell-off of properties in advance.
‘The RLA is all in favour of landlords selling to sitting tenants but it must be entirely voluntary. Anything else amounts to a form of compulsory purchase.’
This sell-off could potentially lead to a crash in house prices, warned Tory MP for North West Leicestershire Andrew Bridgen.
‘These policies would destroy the private rental market as well as crash the entire housing market. It would also lead to a rise in homelessness, which Labour claims to be against,’ he said.
A sudden reduction in the size of the private rented market could also exacerbate the supply and demand imbalance which experts fear will push up rents in the near-future.
If McDonnell’s plans were to also include the same minimum three-year waiting period before eligibility as the existing Right to Buy scheme, this could potentially lead to landlords evicting tenants before the three years is up to avoid triggering the right to buy.
Meanwhile, tenant groups have met the proposals with luke-warm support.
Dan Wilson Craw, director of tenant campaign group Generation Rent, said: ‘If a landlord wants to sell up, then their tenant should have the right to buy if they have the means to do so.
‘And because the landlord already has a customer they wouldn’t need to use an estate agent so the tenant could negotiate a discount.’