Tax relief will be restricted for wealthier landlords, down from 40 and 45 per cent currently to 20 per cent for all individuals by April 2020, according to today’s (8 July) summer Budget.
Speaking in the House of Commons earlier, chancellor George Osborne announced a more level playing field will be introduced 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,” he stated.
“For the wealthiest, every pound of mortgage interest costs they incur, they get 45p back from the taxpayer.”
This has fuelled rapid growth in buy-to-let properties, which now account for over 15 per cent of new mortgages, something the Bank of England warned last week could pose a risk to our financial stability.
Mr Osborne promised to act, but in a proportionate and gradual way, retaining mortgage interest relief on residential property, but restricting it to the basic rate of income tax.
This will be phased in through the withdrawal of the higher rate reliefs over a four year period, starting in April 2017.
The Budget document explained that this will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay.
Alex Hammond, Kensington Mortgages’ head of market and communications, said that the cut in mortgage interest tax relief to the basic rate for buy-to-let investors should concentrate the minds of anyone planning on becoming a landlord.
“Everyone likes a generous tax break but the reality is that landlords should not be investing simply for the tax relief and that remains the case after the Budget announcement.
As the chancellor said, buy-to-let has been a massive success story and that should remain the case even after the Budget; specialist lenders are committed to the market and there is still a strong case for expansion.”
In addition, the government will also reform how landlords of residential property account for the costs incurred in improving and maintaining rental property.
Currently, landlords of furnished properties can deduct 10 per cent of their rent from their profit to account for wear and tear, however from April 2016, this allowance will be replaced with a new system that enables all landlords of residential property to only deduct costs they actually incur.
This ‘Rent-a-Room’ relief will go from £4,250 to £7,500 a year from next April.
Mr Osborne’s third property act was already announced earlier this week - the move to phase in a new £175,000 allowance when a property is left to your children or grandchildren, from 2017.