Landlords’ hit as Chancellor targets mortgage interest tax relief

July 9, 2015

Many of the U.K.’s 2 million private residential landlords will see their net earnings reduced after the Chancellor, George Osborne announced a phased reduction in  mortgage interest tax relief in his summer Budget yesterday.

In a controversial move that will, according to the Chancellor, ‘level the playing field for homebuyers and investors’, the amount landlords can claim as relief will be fixed at the basic rate of tax – currently 20%.  Wealthier landlords receive tax relief at 40% and 45%.  This tax relief will be restricted to 20% for all individuals by April 2020.

Reaction from both the industry and landlords has been mixed. Some predict that in trying to cool the property market, the government will inadvertently create new issues for tenants if landlords try to recoup some of their losses.

Phil Stewardson, Owner of Stewardson Developments believes the new budget will lead to an increase in home rental prices: “The Chancellor, George Osborne, has announced a major blow in his budget for Buy-To-Let landlords with mortgage interest relief being restricted to basic rate of income tax – this massively under-estimates the importance of small scale landlords who make up the vast majority of the sector.

A consequence of this will be increased rents. This is a knee-jerk reaction and ignores the real issues within the housing sector which are lack of supply and availability of finance.

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Eric Walker, M.D. of Northwood believes that the implications aren’t as bad as the headlines imply, particularly for those with an eye on the longer term.

“The effect for the average landlord in respect of changes to mortgage relief will be around £25 per month. So whilst the changes are definitely unwelcome, they are unlikely to be a game-changer for most landlords.

Potentially of greater concern is the pressure on Housing Benefit which may further deter landlords from renting to those most in need of low cost housing. The reduction in taxable benefits in the buy to let sector may deter landlords from buying. The resultant lack of stock will have more of an effect on rents than the reduction in mortgage relief. I am also concerned that this policy will further deter landlords from obtaining proper buy to let mortgages.”

Brian Murphy, Head of Lending at Mortgage Advice Bureau (MAB), believes that the restrictions on buy-to-let mortgage interest tax relief announced in the Budget will almost come as good news to those landlords who feared it would be completely abolished.

“Totally removing the tax relief could have led to significantly reduced profits for borrowers who pay above the basic rate of income tax, particularly as mortgage interest represents a significant proportion of landlords’ annual costs. The decision to halve the 40% tax relief may not be popular, but will be far easier for landlords to adjust to.

A complete removal of mortgage interest tax relief could also have led to higher rents for tenants in order to help cover landlords’ financial loss. However, the more limited restriction on tax relief is being gradually introduced over four years from April 2017, so landlords have plenty of time to forward plan how they will adjust to the changes without resorting to sudden hikes in rents.

Landlords are often unfairly used as scapegoats for the problems facing the residential housing market. Although housebuilding has picked up recently, planning, provision of materials and suppliers and industry capacity is still at a relatively low level compared with the number of properties needed.  The Government must now focus on a comprehensive long-term house building plan to work alongside wider plans for the economy.”

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From April 2016, the ‘wear and tear allowance’, which allows landlords to reduce the tax they pay (regardless of whether they replace furnishings in their property) will be replaced by a new system that only allows  tax relief when  furnishings are replaced.

Finally from a property perspective changes to inheritance tax mean that from 2017 an individual can effectively pass their home over to their children or grandchildren tax-free. The potential knock on impact may be that elderly people choose not to downsize, safe in the knowledge that their offspring will not be faced with a large tax bill when they die. The Intergenerational Foundation claim more than a third of the housing stock is currently under-occupied, which means they have at least two spare bedrooms. More than half of the over 65s fall into this category and as a result are “hoarding housing” It’s a bold claim and one that the latest budget has done little to negate.

A full summary of the Budget can be found >>> here.

Northwood provides a full range of lettings and sales services and is a leading supplier of Guaranteed Rent across the UK, giving landlords complete peace of mind that their rent will be paid each and every month.

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