Chancellor slashes tax relief for buy-to-let landlords

8th July 2015


The Chancellor has dealt a blow to buy-to-let investors, announcing that tax relief on mortgage interest will be cut back from up to 45% to  20% over the next four years.

In his Summer Budget speech this afternoon, the first since the Conservative’s election victory, George Osborne said he wanted to create a level playing field between people trying to buy their own homes and buy-to-let borrowers.

The changes would “address unfairness in our taxation of property, and put the security of home ownership first”, Osborne said.

However, later in his speech the Chancellor mentioned that support for mortgage interest,  which is paid to some home owners in financial difficulty, would become a “loan” instead of a “benefit”.

Osborne said: “We will create a more level playing-field between those buying a home to let, and those who are buying a home to live in.

“Buy-to-let landlords have a huge advantage in the market as they can offset their mortgage interest payments against their income, whereas homebuyers cannot.

“And the better-off the landlord, the more tax relief they get.

“For the wealthiest, every pound of mortgage interest costs they incur, they get 45p back from the taxpayer.”

The Chancellor drew upon warnings that the booming buy-to-let sector could be a threat to economic stability.

He said that landlords’ tax relief  “has contributed to the rapid growth in buy-to-let properties, which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability.”

But he pledged to act in a “proportionate and gradual way”, acknowledging that “many hardworking people who’ve saved and invested in property depend on the rental income they get”.

Osborne said: “We will retain mortgage interest relief on residential property, but we will now restrict it to the basic rate of income tax.

“And to help people adjust, we will phase in the withdrawal of the higher rate reliefs over a four year period, and only start withdrawal in April 2017.”

Yet Osborne announced a separate measure boosting the tax allowance for homeowners who take on a lodger.

He said: “The rent-a-room relief is designed to help homeowners who rent out a room in their home. It’s a good scheme, particularly in a world where more and more people are renting out rooms online, but the relief has been frozen at £4,250 for 18 years.

“Next year, we will raise it to £7,500.”

Phil Nicklin, real estate tax partner at Deloitte, said the reduction in tax relief on buy-to-let  properties would nearly double the cost of borrowing for the highest rate taxpayers, meaning they would make less in profits than they would pay in tax.

He said: “This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit.

“This measure must make Buy-To-Let investment a less attractive proposition in future and may reduce the options for those who see it as an alternative to a pension. The proposed restriction in interest relief reduces affordability for Buy-To-Let landlords and might force some to sell their properties. This could have an effect on the housing market and the availability of rental properties.”

The Council of Mortgage Lenders warned of the “potentially huge” impact of switching relief on mortgage payments for borrowers in difficulty to a loan rather than a benefit.

CML director general Paul Smee said: “The most significant Budget announcement for the mortgage market is the fundamental change to Support for Mortgage Interest, which will change from a benefit to a loan in 2018.

“This is a radical change and we will need time to consider it and work through the practicalities and logistics. The systems and risk challenges for our members arising from such a change are potentially huge.

“Our members already go to significant lengths to support customers through temporary periods of difficulty, and will continue to do so. We will do our utmost, whatever the landscape of State provision, to keep in their homes customers whose problems are temporary and whose circumstances will allow them to get back on track over a reasonable timeframe. But this is a change that could have wide implications.”

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