Review of the Private Rented Sector: Volume 4: Bringing Private Sector empty houses into use

9 ENABLING POWERS FOR BRINGING EMPTY HOMES INTO USE

9.1 This chapter looks at financial enabling powers available to local authorities, RSLs and owners in both England and Scotland to bring empty homes back into use.

Bringing empty homes into the private rented sector

9.2 The online survey showed that, in Scotland, the most successful implementation mechanisms available to local authorities for dealing with empty homes have been those that provide support to private landlords, such as private sector leasing ( PSL) schemes and rent deposit guarantee schemes ( RDGSs) ³⁶ . Both these schemes are well established in Scotland; however, the extent of their use for dealing with empty homes as opposed to wider working with private sector landlords to make lets available to those in housing need is not clear.

9.3 RDGSs provide a service to assist and support persons who are in housing need and who may have difficulties in access private sector housing because they are on benefits or who have difficulty in finding deposits or rent in advance. Schemes will generally offer a written guarantee to landlords in place of the deposit. In July 2008 there were some 28 deposit schemes in Scotland with two further schemes in development.

9.4 In terms of PSL schemes attracting empty homes back into use, it is most likely properties would have to be in a reasonably good state of repair and available for occupation at low preparation costs. It is less likely to be of value with long-term empty homes that are more likely to need more extensive repair and upgrading costs. These schemes are typically operated by local authorities or housing associations in conjunction with the local authority.

9.5 English examples offer a broadly similar approach to assisting owners to become private landlords using RDGSs (Newcastle and South Oxfordshire) and a number of leasing and rental schemes linked to offers of loans to owners to improve empty properties, providing the owner subsequently makes the home available for rent (Plymouth City Council). A similar model was found in Kent where loans were available to help owners/developers refurbish or convert empty homes or redundant commercial buildings. The Kent loan fund operated as a revolving fund, so that as loans were repaid, the money was re-lent to support new schemes. South Oxfordshire Council required the owner to accept nominated tenants in exchange for a loan from a revolving loan fund. The rent was paid directly to the Council to repay the loan. Islington Borough Council developed a housing association leasing scheme where the offer of an improvement loan was linked to the lease of the home to a housing association.

9.6 However, a number of the English leasing schemes appeared to seek a longer term tenancy and thus avoid some of the difficulties and expense that arise with the continual turnover of temporary tenancies. Examples of agreements to make properties available for rent were also found e.g. the Plymouth " Houselet" scheme involves giving loans, if required, to bring a house up to standard and then provision of a guaranteed rental for 2-3 years with a partnership agreement requiring the owner to continue rental at a rent linked to the local housing allowance for a further 5 years. The loan cost is recovered from the rent.

9.7 The English examples of the successful use of loans to bring empty homes back into use for rent should give confidence to Scottish local authorities about the impact of the likely reduced availability of grants under the Scheme of Assistance. Loans to support repairs or upgrading could be offered under the Scheme of Assistance by Scottish local authorities and possibly linked to leasing agreements and nomination arrangements of households in housing need who had been assessed as able to sustain a tenancy.

Voluntary transfer of ownership of properties

9.8 Not all owners of empty homes want to become landlords or even retain ownership. The research found examples where an authority would act as an intermediary between an empty home owner and a potential buyer. The buyer would be assessed by the local authority as a low income household or key worker but capable of sustaining the cost of a mortgage. Alternatively, the local authority could "place" the empty home owner with an RSL who would purchase the empty property ( e.g., Islington Council and Kent County Council case studies). Manchester City Council estimated that roughly 20% of the empty properties that it deals with would move into private landlord ownership (although 60% would become owner-occupied and 20% of the most "critical" properties would become owned by RSLs).

Financial incentives

Tax Incentives and tax penalties

9.9 One approach to bringing empty properties back into use has been to adjust taxation to incentivise owners. Three types of tax changes are relevant:

• A reduction in the Council Tax ( CT) discount. Local authorities in Scotland were given discretionary powers in 2005 to reduce the CT discount on empty and second homes to a maximum of 50% and a minimum of 10%. The aim was to provide an incentive for owners to bring their houses speedily back into use. All additional income raised is retained locally and can be used to improve empty homes to provide affordable housing, provide new-build affordable housing in areas determined by councils, and some other purposes. ³⁷ In setting discount levels on empty homes, local authorities need to be aware of perverse effects with some owners seeking to have potentially useful properties declared uninhabitable or demolished. One English authority noted that some discount should be offered or owners would simply claim the Single Person's Council Tax Discount of 25%.
• A reduction on the VAT on property repairs to 5% for homes that have been empty for over 2 years. This effectively reduces repair costs by 10%.
• Capital allowances on conversions. Shop owners carrying out homes-over-the-shop conversions and owners converting commercial premises to residential use may also be able to claim 100% capital allowances ³⁸ for conversion work so making it possible to "save" up to 40% of net costs, as tax relief ³⁹ .

9.10 Local authorities should make owners aware of such tax incentives to encourage owners to reduce the cost of repair work to their empty homes (or carry out conversions). Local authorities could promote these through their Scheme of Assistance and then link such incentives with other sources of finance and assistance as a package that also brings the former empty home into use for housing need.

Scheme of Assistance

9.11 The Scheme of Assistance under the 2006 Act is likely to lead to local authorities reducing the use of improvement and repair grants in favour of loans and other forms of assistance. Each local authority will, in future, determine their own priorities, the types of assistance they will offer in relation to different work types, taking into consideration the personal circumstances of each owner. Although a small positive effect overall was expected from the Scheme of Assistance, about a quarter of Scottish local authorities responding to the online survey thought it could have some negative impact on the success of bringing empty homes back into use with the reduction in the availability of grant being cited as a particular issue. This of course was a view in advance of the Scheme becoming operational. In fact, the 2006 Act allows local authorities to offer a wider range of support - including where the owner intends to rent an empty property.

Lead Tenancies and Rural Empty Property Grants

9.12 The Lead Tenancies ( LTs) grant is only available in Scotland. Under the Lead Tenancies Scheme ( LTS), an owner improves the property using grant and leases the property to an RSL for a maximum of 20 years ⁴⁰ . The RSL then manages and maintains the property, using it for short-term affordable renting using the Short Scottish Secure Tenancy. Rural Empty Property Grants ( REPGs), while also only available in Scotland, differ from LTs in a number of ways. The length of agreed rental period under an REPG is related to the level of funding available. Subsidy levels differ. An LT can be provided with up to £2,435 per year of the lease or a maximum of £48,700 while an REPG is normally fixed at a maximum of 33% of eligible cost (see Annex 5 for details).

9.13 A LT can be used anywhere in Scotland, operates by a lease to an RSL and is let on the basis of housing need, whereas an REPG is restricted to rural areas, is managed directly by a private sector owner, often an estate, and is targeted at prospective tenants who are employed or have received a formal offer of employment in the area (though lets to non-economically active tenants with a local connection may be possible in specified circumstances). The fact that an owner may choose the tenant is an advantage as far as owners are concerned.

9.14 LTs have been criticised ⁴¹ as being complex to set up, particularly the establishment of responsibilities and obligations between the owner and the RSL. The requirement to pay back grant should the RSL lead tenant decide to pull out of the project was said to have put off many potential owners. However, there were successful developments that overcame these issues. Grampian HA developed LTs with a number of owners and developed expertise in dealing with the complexities that are off-putting to less experienced RSLs. In its use of LTs, Grampian found that it needed to insert a clause saying that it would only terminate if there were "due cause".

9.15 Table 9.1 shows performance achieved under each scheme. The table shows that REPGs tend to be smaller and cheaper schemes than LTs though available for similar lengths of rent on average (though there was greater variation of length of rental agreement with the REPGs ranging from 5 years to 30 years.) The small size of the schemes implies that, especially for LTs, the RSLs' development and management costs per unit will be high. (This can also be an issue generally for RSLs developing in remote rural areas.)

Table 9.1: Comparison of Lead Tenancies and Rural Empty Property Grants

Performance criteria	Lead Tenancy Scheme	Rural Empty Property Grants
Size of project	Average of 7 units per project	Average of 3 units per scheme
Number of units developed	242 units developed for LTs since 1994 (17 units p.a.).	185 units were developed under REPG since 1991 (approximately 11 p.a.)
Average grant level achieved	No data available but £2435 per year of rent per unit available	£1,892 per year of rent per unit
Average length of lease available / agreement to make available for rent under scheme	19.8 years	21.1 years

Source: unpublished data supplied by Scottish Government

9.16 Since 1994 there have been 242 units developed for LTs (17 units p.a.) ⁴² . However, in recent years, LT activity has declined. This may be due to a number of reasons including, until recently, the overheated housing market that meant a property could increase in value faster than the increasing cost of disrepair; the fact that the LT grant had not increased in value for many years and the lack of any publicity materials on LTs available either in print or online. While LT grant has been increased in the past two years, it is too recent to establish the impact of this increase on the popularity of the scheme.

9.17 Two case studies illustrate some of the complexities and risks for owners of using REPG grant.

• Information ⁴³ about one REPG concerned the conversion of a steading in Argyll to provide five dwellings. The owner here succeeded in making this grant work for him by using a number of tactics including using his own labour and applying for the 5% reduced rate of VAT. Originally, the owner was prepared to commit the properties for rent for 15 years. However, this owner, an accountant, managed to master the spreadsheet and realised that the cap on grant would be the same whether the house was available for rent for 12 years or 15 and subsequently reduced the length of time he was prepared to commit the property for rent. The cap on grant was almost counter productive in this case.
• In the CNPA area the improvement for letting of three empty cottages did not proceed due to a development funding gap (the difference between the current value and cost of improvement and the final value) of £57,000 on 3 cottages. Communities Scotland suggested a grant of £77,169 under the REPG scheme, provided the owners undertook to rent the houses out for a minimum of 20 years at a rate of £345 per month. The owner estimated his contribution as £189,838 and despite a very low voids assumption, a significant annual loss of over £2,000 per property would arise. A further consideration for this owner, only indirectly related to the REPG, was the implication of 40% inheritance tax when the property was transferred between generations.

Impacts and costs of Lead Tenancies and Rural Empty Property Grants

9.18 The Scottish LT and REPG grant mechanisms have not, numerically, had a major impact on empty home numbers with a total of only 427 properties brought back into use through these mechanisms since 1991. (See table above). Though well targeted, the individual grant levels for REPG and LTs are low, especially compared with some of the grants offered in England, and the cap at 33% for REPGs may be counterproductive with owners scaling back on their initial commitment to rent for a longer length of time where there is no financial benefit. Clearly, however, there is a need to limit grant and it seems appropriate to benchmark grants at or below HAG levels where new build housing, with the potential to offer better quality stock than older refurbished housing is available for rent in perpetuity. The current grant levels for LTs certainly meet this benchmark with the current annual grant maximum of £2,435 relating well to the national indicative level of HAG of £73,000, appraised over a 30 year period.

9.19 However, it is suggested that there may be occasions where a longer commitment to affordable rent can be achieved by increasing the grant cap for REPG. With modest increases, perhaps even up to the 60% cap, the grant would still provide good value and there seem to be no issues with State Aid for a properly established scheme such as the REPG. (State Aid is discussed in Annex 6.)

9.20 The evidence also shows that the grants, if they are to have a greater appeal to owners, should be less restrictive in their conditions, for instance by offering the facility to transfer outstanding grant to a loan in the event that the RSL withdraws from a LT project (see 9.14). Grants also need to be better promoted to owners. However, it could be a matter of concern if such changes reduced the targeting of these grants or substantially increased grant levels at the cost of reducing funding available for mainstream affordable housing.

Conclusion

9.21 There is a lack of data available to demonstrate whether or not tax incentives have had any success in bringing empty properties back into use though there is anecdotal evidence that they can actually act as penalties and have negative effects. The reduction in the CT discount particularly tends to convey the image of the "stick" rather than the "carrot". Other tax incentives could play a part in encouraging owners of empty homes to bring them back into use but better promotion of the benefits (savings) that could arise would be needed. Local authorities should be actively engaging with owners of empty properties at the point where CT discounts are reduced to assist them to get their property reoccupied and encouraging owners to avail themselves of tax incentives (such as the VAT reduction on repairs to empty homes) and other forms of assistance where appropriate.

9.22 Advice and guidance are fundamental but tangible support, particularly through subsidy (traditionally by grant assistance but for the future, more likely by loans) should be a component of local Schemes of Assistance, where appropriate. In England, loans although used to a lesser extent than grants, have proved effective in bringing empty properties back into use. Where loans and grants are used, conditionality in terms of availability to contribute to meeting housing needs through guaranteeing the availability of the home for rent could be imposed.

9.23 The linking of grants and loans to rental or leasing agreements is a model which may fit well with the Scheme of Assistance being developed under the 2006 Act. English local authorities have effectively developed revolving loan funds with rents being paid directly to the local authority to make loan repayments and this approach could be replicable in Scotland.

9.24 The Scottish system of empty property grants ( LTs and REPGs) is well targeted at providing affordable rented housing; however the impact of these grants has been very limited. Moves by the Scottish Government to make these grants less complex (as they appear to owners), to reduce areas of risk for owners and to review the affect of the cap on REPGs, may (provided grant levels are maintained) help bring more empty private homes back into use to meet housing needs.