Budget change set to hit buy-to-let mortgage borrowers

Posted 14 July 2015 by Nick Parkhouse

Thousands of people with buy-to-let mortgages are set to see their income fall after the Chancellor announced changes to mortgage interest tax relief in his summer Budget. George Osborne has restricted the amount of relief that landlords can claim to the basic rate of tax in a move which he said would “level the playing field for homebuyers and investors”.

Experts believe that it may be good news for first-time buyers but that it could also push up rents.

At the moment, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay. Now, the Chancellor of the Exchequer has announced that the amount that landlords can claim as mortgage interest tax relief will be restricted to the basic rate of tax – currently 20%.

The changes will be phased in over four years from April 2017 in a move which the government hopes will reduce the £6.3bn cost of the tax relief.

This is Money reports that the change “will hit middle-class landlords who have a sole buy-to-let property right through to professional landlords with bigger portfolios, who sit in the highest tax bracket”.

Experts believe that the 45% tax relief puts landlords at an advantage in the property market against people looking to buy their first home and so reducing the tax relief could be good news for first-time buyers. However, there have also been concerns that the move may also push up the cost of rents.

The budget document said: “The current tax system supports landlords over and above ordinary homeowners. Landlords can deduct costs they incur when calculating the tax they pay on their rental income. A large portion of those costs are interest payments on the mortgage.

“Mortgage Interest Relief was withdrawn from homeowners 15 years ago. However, landlords still receive the relief. The ability to deduct these costs puts investing in a rental property at an advantage. Tax relief for finance costs is particularly beneficial for wealthier landlords with larger incomes, as every £1 of finance cost they incur allows them to pay 40p or 45p less tax.”

In his summer Budget speech, George Osborne said he wanted to support homeownership but “act in a proportionate and gradual way”.

However, one expert warns some investors could now struggle to make a profit from their buy-to-let properties.

Phil Nicklin, from Deloitte, 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.”

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