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Student Halls Avoid Even More Taxes


It has long been the bane of local student landlords that our taxes have increased annually every year since George Osborne 1st became chancellor in 2010, while at the same time, encouragements for student halls providers have reduced or removed their taxes in almost equal proportion, creating a very unfair playing field. It is now apparent that student halls providers have found a new ruse and many don't even pay Corporation Tax.

Student hall providers are not doing anything illegal – they are simply using the rules that have been put in place to encourage investment in property development to their advantage. This article puts this in context by explaining the underlying mechanics of our tax system and how it is used to drive behaviours, how this has worked against small landlords and in favour of big corporate ones, what a REIT is and how they are used and the article ends with a recommendation of what the government needs to do to focus REITs on what they were designed for and to raise more taxes from some of the areas where they currently operate but were not intended to do.

The Way Our Tax System Works 

The main reason for taxation is to raise funds to meet the government's spending commitments. In its simplest form, a country with 100 residents and a spending plan of £1,000 would tax everyone £10. This would be fine if everyone in the country earnt sufficient that they could afford £10 – but no country is that equal, so different taxes have been introduced in the past to try and ensure that sufficient funds are collected in a way that most people believe is fair (else they would not pay) and in a manner that does not disadvantage too greatly those who do pay. Taxes on income, sales (VAT), wealth, land value, death and other attributes have all been tried somewhere at some time.

Apologies for the simplistic definition of a tax system – but the other reason for taxation in the modern world is to encourage behaviours. When a government wants citizens to smoke less, it will typically embark on a strategy of ever-increasing taxation of cigarettes, with the aim of reaching a level where most people decide the benefit or joy obtained by smoking is insufficient to justify the cost. If the government does not do enough, they will not get the desired outcome and if they go too far, they will encourage the criminal element of the society to create a black market in that product (counterfeit (tax free) cigarettes in this example).

The other aspect of our tax system which is worth commenting upon is that frequently, when a government wants to raise new funds, it will look to increase or create a new tax in some niche where the number of people affected is quite small – in this way, especially if the niche in question is an unloved one, objections to the increase will be limited.

So, for example, the chancellor gets far less pain reducing allowable pension contributions (which only affects top earners) than raising the same amount by a small increase in income tax rates.

There are two downsides to this approach to taxation – firstly everything becomes very complex. The UK tax code (the set of documents which define tax rules) is 17,000 pages long. Hong Kong have a 276-page equivalent. The UK tax code is 12 times the size of the King James Bible and contains 10 million words. This is why UK accountancy bodies have over 350,000 members – that is more than 1/3 million intelligent people doing nothing more productive than helping people work out how much tax to pay… No wonder we have such low productivity in this country.

The other downside is that as a result of the complexity – every time a new rule is added, someone somewhere will scrutinise it and look for the loophole that lets them avoid the tax or the workaround that it allows – so more and more people spend more of their time looking at ways to legally reduce their taxes than they do focussing on increasing their revenues knowing that whatever they earn will be taxed equitably and fairly. So for example, many small landlords have moved to 'serviced accommodation' or 'holiday lets' as these are treated as a business rather than an investment and these are treated more equitably from a tax perspective – so the governments underlying assumption was that increased taxes on Buy To Let would reduce the number of rental properties but free up those properties for 1st time buyers and thus reduce the pressure in the housing market. However, the actual result is the net total of housing available has been reduced and rents and house prices have been forced up as properties leave the housing market and move into the 'holiday sector'. There is another example of this phenomenon of tax avoidance strategies leading to unexpected outcomes which is letting many student halls, known in the trade as Purpose Built Student Accommodation (PBSA's), completely avoid the main tax on businesses.

Increasing Tax Burden For Small Landlords

 An issue for small landlords is that the government has never found a way to differentiate between an investor and a business in this sector. So on the one hand, an investor would be someone who has some money and decides to invest it in a property which he or she then hands to a property manager or letting agent to rent and to manage and the landlord receives a 'net income' in return for his or her investment after the agent/manager has paid all associated expenses. This arrangement is not wildly different to having invested the money in stocks or shares or put it into a savings account and any income is taxed accordingly.

On the other hand, we have the professional landlord – they buy the house, pay all of the expenses associated with letting the house and spend their time managing the property, showing potential tenants around, collecting rents, resolving issues, arranging repairs, etc. If the business is big enough, it is worth 'incorporating' (setting up a limited company) which will then allow you to treat it as a business, pay yourself a salary, deduct all appropriate expenses, etc before calculating how much profit is made and thus how much tax is due. The issue is that the typical professional landlord does not have 50 properties – the average is 1.2 according to some measures and the cost and overhead of incorporating for a property portfolio of this size is just not justified.

Therefore, most landlords fall into the gap between hands-off investor and small business and for tax purposes, the government lumps them all together as investors. This was not ideal but was generally workable with some disadvantages until the then chancellor, George Osborne, decided to use the tax system to reduce the size of the Buy To Let sector. Since then, the burden has increased annually to the point where very few landlords can make a decent return on their investment. Finance charges (for example interest on mortgages) are now taxable – so a small landlord with a £100,000 property and an £80,000 mortgage will have made a £30,000 investment (£20K difference plus buying costs and fees). His mortgage will cost him £4,000/year and his rental income might be £5,000/year – so you would expect him to be taxed on the £1,000 profit. However, he is taxed on the full £5,000, so for a 40% tax payer he will owe £2,000 even though his profit on his £30,000 investment is only £1,000. Compound this with the changes to stamp duty which make it much more expensive for small landlords to buy and capital gains which means we lose much more of any gain when we sell, and it is not surprising so many landlords are leaving the sector and rents are increasing owing to the reduced supply.

For student landlords the situation is even worse as during the same period, what was once a property that was exempt from Council Tax is now being billed for every day that the local authority can argue it was unoccupied or occupied by someone who was not a student on that particular day.

Reducing Tax Burden For Student Halls

We have long complained that we are not treated fairly when compared to student halls (PBSA – Purpose Built Student Accommodation). Someone, somewhere obviously decided the country needed more student halls as planning rules were changed such that PBSA did not need to pay business rates and any developments were not subject to the Community Infrastructure Levy. Also, as they would be occupied by students, they would also be exempt from Council Tax.

Thus developers all over the country with city centre land to develop looked at the available options and quickly concluded that if a block on that site was going to cost £xM regardless of what it was used for, then the best way to make money was to opt for the solution which had no CIL charges, thus reducing the developers costs and no council taxes or business rates as that would make it more appealing to customers as costs of operation would be lower.

So we have far more PBSA units around the country than we need, we have a shortage of affordable housing and city centre office accommodation and hotels all driven by government encouragement (rightly or wrongly) through the tax and planning system which has led developers to choose to build PBSA at the expense of all other alternatives.

We have long argued that 100 students living in 25 small HMO's in the city is far preferable to the same number living in a PBSA because apart from the fact the students become part of the community, their costs are lower and thus their overall debt is reduced, their landlords live and work in the city and the rent thus goes into the local economy and is spent supporting local shops and tradespeople rather than being managed by some 'out of city' company and leaving the local economy completely.

But it is actually worse than that, due to a new tax avoidance ploy being adopted by many PBSA providers.

What is a REIT?

A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Initially introduced in the US in 1960 and legalised in the UK in 2007, REITs pool the capital of numerous investors. A REIT allows investors to buy shares in commercial real estate portfolios—something that was previously available only to wealthy individuals and through large financial intermediaries.

Properties in a REIT portfolio may include apartment buildings, data centres, healthcare facilities, hotels, infrastructure—in the form of fibre cables, cell towers, and energy pipelines—office buildings, retail centres, self-storage, forestry and warehouses.

This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves and as REITs are publicly traded on the stock exchange, they are liquid assets that can be bought and sold without delay, unlike property which can take years to turn into cash.

This is another example of UK government encouraging investment in a certain area (commercial property) and using the tax system to optimise desired outcomes.


Gunwharf Quays is a great example of a REIT at work. Land Securities is the largest commercial property development and investment company in the UK. It raises funds by selling shares to retail and institutional investors, pension funds and the like on the stock market and then uses that money to buy land and develop sites as it did at Gunwharf Quays.

The distinction between 'investment' and 'business' works in this example. Gunwharf is home to over 90 stores plus 30 restaurants and bars – each operated by a business which files its own accounts and pays Corporation Tax on any profits. To make this all possible and to allow the industry to find sufficient funds to invest in ventures such as this, the UK government allowed some companies to become REIT's and as a REIT, there are certain rules that need to be followed but one of the benefits is that as a financial vehicle designed to raise funds to help other businesses, a REIT is not liable to Corporation Tax. There is some logic to this – if all of Land Securities tenants at Gunwharf have paid Corporation Tax on their profits, asking the REIT that provides the premises for these companies also to pay Corporation Tax risks double taxation which would mean the model does not work as intended.

This is an argument that can be argued the other way – double taxation is fine in so far as every pound is taxed each time it changes hands, either in VAT or income tax, so double taxation is not necessarily a bad thing – but it is seen as a disincentive to investment in property if both the landlord and the tenant are paying corporation tax.


The problem is, there are companies which chose to become REIT's solely to reduce the amount of tax they pay. Unite Students Limited operated from 2007 until 2016, prior to that, effectively the same company had traded since 1991. Most years they managed to avoid paying Corporation Tax by setting off their profits against various allowances (2008 example: £35M turnover, £2M profit, £0 tax paid). However, in 2016 they reinvented themselves as The Unite Group PLC, a REIT – this gave them access to much more money without having to borrow, so they could ramp up their schedule of PBSA developments – one of which was Greetham Street here in Portsmouth.

The bad news is that as a REIT, in 2018 with profits of £245M Corporation Tax (@ 19%) of £46.5M would have been due – but nothing was paid as this is an 'investment vehicle' and not a 'functioning business'. Had they been investing in property and managing business tenants, business rates and corporation tax would have been paid by the tenants justifying the REIT status (encouraging investment in property thus allowing other companies to grow). However, as all of their tenants are individuals who pay no tax, managing PBSA developments in a REIT is a great way to make a lot of money and pay no tax.

Please note, Unite Students is just an example as they have local property – many PBSA developers use the same ruse to avoid taxes.

What Government Needs To Do

Based on our research locally, the average private sector 'small landlord' pays around £500 per year per HMO room in income tax and an additional £200 in Council Tax. From what we can work out, it would appear the average student room in a REIT owned and operated PBSA pays no Council Tax at all (although PCC have stated that they will start to apply the same rules as they apply to us) and around £200 per room in taxes other than Corporation Tax.

So with approx. 9,000 student halls rooms in the city, the local council are losing out on an estimated £1,800,000 council tax and central government £2,700,000 – this is replicated across the country so the national numbers are significant with the UK student accommodation market valued at more than £50Bn by Knight Frank.

The chancellor needs to change the rules on REIT's such that when they are an investment vehicle and their tenants are paying local and national taxes, they are exempt from Corporation Tax but when they are operating a vertically integrated business that includes the provision and management of student accommodation or similar, they pay Corporation and other taxes as their tenants would do on the property management aspects of their business.

Unfortunately this will add more pages to the UK tax code, but until and unless we see a major simplification of the way taxes are levied in this country, it has to be an acceptable alternative to doing nothing and allowing the market to continue to be distorted by a small group of businesses making excess profits at the exchequers expense.

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