Kenneth Clarke, who is considering a further reduction in mortgage tax relief for home owners in the Budget, is being pressed to make renting more attractive.
The Department of Environment wants tax relief for renting to be directed at landlords, rather than tenants, to encourage the provision of more rented accommodation by making it more profitable.
The pressure on the Chancellor to take action follows meetings at the Department of Environment between some of the main building societies and Sir George Young, the housing minister. The building societies said they were not investing more in property to let because the commercial returns were too low.
John Major signalled his support for the scheme in a recent, little-noticed speech, when he made it clear further steps would have to be taken if the private rented sector was to be put back on its feet.
'There's clearly a need for a larger private rented sector in Britain. Tenants, especially young ones, demand it. We have released some of the old shackles on landlords, but we may need to go further if the sector is to show any significant growth,' Mr Major, a former chairman of the Lambeth borough housing committee when Sir George was also on the council, said.
The tax relief package would operate like the Business Enterprise Scheme, which was ended in the last Budget.
The BES was attacked by Labour on the grounds that some firms used it to buy up repossessed homes as a tax dodge, but ministers believe the main disadvantage was that it produced short-term investment.
The aim of the new scheme would be to provide tax incentives for longer-term investment in rented accommodation. Another option, favoured by a Commons select committee, which is also being studied, is the provision of grants to the private sector for investment in private rented accommodation.
Ministers have now accepted in principle that they have to bridge the gap with some form of incentive - and tax relief is the favoured option.
Stimulating the rented sector is seen by ministers as the next stage of housing reform to follow the 'Right to buy' council homes. Sir George said: 'It is one of the challenges of the fourth term to get private renting going again. I don't mean peeling terraced housing in poor condition, incompetently managed at exhorbitant rents. I want responsible, long-term good-quality accommodation, professionally managed. I think that is what the institutions want as well.'
Ministers believe there has been a change of attitude since the 1988 changes to the Rent Act. The spectre of Rachmanism conjured up by private landlords has faded, but ministers accept they have failed so far to revive the rented sector, which they believe provides greater mobility of labour and helps to reduce the numbers being made homeless.
John Gummer, Secretary of State for the Environment, is seeking to revive the practice of lodging to overcome some of the problems facing young people. He will be urging the churches to co-operate in offering a network of contacts who may offer a spare room and will be pressing Mr Clarke to increase the pounds 3,000 tax-free annual allowance for those taking in lodgers.
His department is keen to answer criticism about the numbers of families being made homeless as a result of the recession. Ministers point to a 38 per cent fall, down to 12,000, in the number of families in bed and breakfast accommodation at the expense of the taxpayer.Reuse content