Budget 2015 slashes buy-to-let landlords profits over mortgage interest tax relief

Thousands of buy-to-let landlords will see their earnings hit after George Osborne cracked down on mortgage interest tax relief in his summer Budget today.

In a move which will ‘level the playing field for homebuyers and investors’, according to the Chancellor, the amount landlords can claim as relief will be set at the basic rate of tax – currently 20 per cent.

This change will be phased in over a four-year period from April 2017. Currently, landlords can claim tax relief on monthly interest repayments at the top level of tax they pay of 45 per cent. Mortgage interest relief is estimated to cost £6.3billion a year, a Freedom for Information request revealed recently.

It 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.

Some experts believe the move could also force landlords to hike rents to compensate for the blow, which would spell bad news for tenants.

But it could be good news for first-time buyers who are competing with landlords on the property market which is currently seeing demand outstripping supply.

The move comes as the Bank of England said last week it will monitor the booming buy-to-let sector in the coming months. This year, buy-to-let lending has accounted for more than 15 per cent of mortgages taken out.

Watching landlords: Chancellor George Osborne announced tax relief changes today – while the Bank of England is keeping a watchful eye on the industry 

It also comes after the National Landlords Association warned yesterday that costs in the private rental sector could rise by up to £2.6billion if mortgage interest payments for the buy-to-let sector were made non-deductible.

Many experts have previously said the 45 per cent tax relief puts landlords at an advantage in the property market against first-time buyers. 

In the budget document, it says: ‘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‘Mortgage Interest Relief was withdrawn from homeowners 15 years ago.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.’

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 turn a profit. 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.’ 

Adrian Anderson, director of Mayfair-based mortgage broker Anderson Harris, said: ‘There had been fears among landlords that relief on mortgage interest payments for buy-to-let landlords would be completely abolished so while the changes will hit higher-rate taxpayers, it is not as bad as it might have been.

‘It is only fair that there is a more level playing field between first-time buyers and landlords but if this tax break had been completely withdrawn, buy-to-let would have been far less attractive to investors.

‘Thousands of landlords may well have struggled to keep up repayments on their mortgage or struggle to pay the tax, especially when interest rates rise.’

Robert Pullen, manager at Blick Rothenberg Chartered Accountants, said: ‘Buy-to-let landlords are now being hit further by a restriction to tax relief on mortgage interest payments.

‘The new rules appear complex; basic rate tax relief is permitted only and will be phased in. This may result in a shortage of let properties, or an increase in rental rates charged to compensate landlords.’

Gráinne Gilmore, head of UK residential research at upmarket estate agents Knight Frank, said: ‘This is a significant change in tax status for those with a rental portfolio, although the measured rate of introduction between 2017 and 2020 will help landlords plan their approach.

‘Those planning to purchase a buy-to-let property will have to factor these new rules into their calculations, and this could affect the offers they are willing to make.

‘If the relatively low yield environment seen today, especially in the South of England, is still evident when these changes start to come into force, there could be upward pressure on rents.’

The budget document has also revealed the current system that allows those to claim 10 per cent of their rent for wear and tear will be scrapped. From next April, landlords will only be able to deduct costs they actually incur.

The Chancellor also announced an increase in the amount of money homeowners can earn in rent from lodgers before tax. It comes after many campaigned for a higher earning level in the rent-a-room scheme.

The level has been set at £4,250 of income for the past 18 years, but will rise to £7,500 from April 2016.

Matt Hutchinson, director of website Spare Room has campaigned for the last six years for a higher threshold.

He said: ‘There are an estimated 19million empty bedrooms in owner-occupied properties in England alone. Freeing up just five per cent of those rooms would accommodate almost a million people – the equivalent of a city the size of Birmingham.

‘Encouraging people to take in lodgers could help them avoid repossession when interest rates rise and their mortgage repayments are adjusted.

‘The threshold has remained unchanged at £4,250 for 18 years. Only a fifth of UK towns and cities have average room rents of below that mark, while all rooms in London are way outside of the threshold.’