Buy-to-let: Why tax relief change for landlords is bad news for all (2024)

The property industry has rounded on George Osborne for cutting tax relief on private rental properties.

In a Budget that favoured homeowners over buy-to-let landlords, the Chancellor slashed the tax relief that private landlords receive on their mortgage interest payments, cutting it from 40pc or 45pc to 20pc by April 2020.

Fresh research by PwC shows landlords will incur losses when the Bank of England starts to raise the base rate, which analysts expect to happen in the second half of 2016.

On a property worth £100,000, a landlord in a higher tax bracket – with an 85pc loan-to-value mortgage and a mortgage interest rate of 5pc – would end up losing £100 a year. When the rate reaches 5.5pc, the burden on the landlord’s finances will jump again, triggering a loss of £440, and then to £780 when the rate reaches 6pc, according to PwC.

“This will hit those people who sank their money into property because they were getting no interest on their savings in the bank, or following the financial crisis, no longer trust the pension model, and are relying on rental income,” said Phil Nicklin, a tax partner at Deloitte.

The Government, which has been trying to boost home ownership by helping first-time buyers, said the changes will only affect one in five landlords.

Mr Nicklin said the Chancellor had not taken into account that the wealthier landlords own more than one property and therefore this policy could starve the market of rental homes.

David Thomas, the new chief executive of Barratt Homes, said 10pc of the housebuilder’s completions were bought by buy-to-let investors, including a high proportion of cash buyers, and said that the change would not have a “major impact on property as an asset class”.

But to let is a business, not an investment and finance costs should not be taxed. http://t.co/mHOeDCVAX7

— Richard Blanco (@richardblanco_) July 8, 2015

In response, Mr Nicklin said “10pc is a big, big number and housebuilders only build homes if there are people to buy them,” suggesting the construction rate could slow in an era when the country is building half the number of units needed to house its expanding population.

Data from the Department of Communities and Local Government have shown that of 57pc of the increase in housing stock between 1986 and 2012 was accounted for by private rented accommodation, which demonstrates the importance of the small, private landlord to the UK’s housing supply, said Alan Ward, the chairman of the Residential Landlords Association.

“Undoubtedly, it [the scaling back of tax relief for landlords] will mean less money available to maintain properties, and standards will slip,” he said.

But the overwelming concern echoed across the property industry in the 24 hours after the Budget was the impact on tenant finances.

Economists at the Institute for Fiscal Studies said: “There is a big problem in the property market making it difficult for young people to buy, and pushing up rents. The problem is a lack of supply. This change will not solve that problem.”

Jennet Siebris, the head of residential research at the property group CBRE, agreed that this policy will cause landlords to pass the increase in tax on to their tenants in their monthly rent.

Arguments

For: It will stop more landlords piling into an overheated buy-to-let market

Counter: But the Bank of England's stance, reining in high loan-to-value buy-to-let mortgages, will do that.

For: It will trigger a sell off of buy-to-let homes releasing supply into the market for first-time buyers and controlling house prices

Counter: But it will limit the supply for renters who cannot necessarily afford the deposit to buy a new home

Counter: A restricted rental supply will push up rents.

Counter: Building more homes for both the rental and owner occupier markets would go further to control price inflation.

For: It is only fair that as homeowners cannot offset their mortgage payments then neither should landlords.

Counter: This is is comparing apples with pears. Homeowners are not running businesses nor do they pay capital gains tax, for example, on disposal of their property.

Counter: Landlords offer a service to tenants and should therefore be entitled to offset their interest payments as other service operators are able to do.