Britain’s two million buy-to-let landlords were left reeling after the chancellor slashed tax relief for property investors, provoking warnings of a potential mass sell-off of homes - or widespread rises in rents.
In a £2bn tax bombshell, from April 2017 landlords will no longer be able to claim tax reliefs worth 40% or 45% of the interest payments on their buy-to-let mortgages. Instead, the maximum tax relief will be set at 20%, although the change will be introduced over a four-year period.
In a second raid on landlord tax breaks, property investors will also lose the right to automatically claim 10% of the rent against wear-and-tear costs. From April 2016, landlords will only be able to deduct costs they actually incur.
The chancellor also announced a major extension in the tax break for people who let a room in their own home to a lodger. Homeowners will be able to receive as much as £7,500 in rent from lodgers without having to pay tax, compared with the current ‘rent a room’ limit of £4,250. The change comes into effect from April next year.
Genevieve Moore, partner at accountants Blick Rothenberg, said the raid on tax breaks for landlords “could see a flood of buy-to-lets being sold as the squeezed middle bow out of rental market”. But Britain’s most controversial buy-to-let landlord, Fergus Wilson, whose property empire at one point stretched to more than 1,000 homes, said: “It will drive rents upwards to compensate. In Maidstone I have no houses available to rent. It will always be a case of supply and demand and with an ever increasing volume of tenants the price will go up. There is only one answer to the country’s problem and that is to build more houses.”In one of the budget’s most well-guarded secrets - and which stunned campaigners who have been calling for a level playing field between first time buyers and investors - George Osborne said buy-to-let landlords have a “huge advantage” over homebuyers because they can offset mortgage interest payments against their income. “And the better off the landlord, the more tax relief they get,” he added.
Osborne said this had contributed to the rapid growth in buy-to-let properties, which accounted for more than 15% of mortgages taken out this year, and had caused the Bank of England to sound a warning about the market.
“So we will act. But we will act in a proportionate and gradual way, because I know that many hardworking people who’ve saved and invested in property depend on the rental income they get,” he said.
The gradual removal of tax relief is expected to bring the Treasury £225m in 2018/19, rising to £665m in 2020/21, while the removal of the 10% wear-and-tear allowance is forecast to make £205m in 2017/18, falling to around £165m in subsequent years.
Duncan Stott, director of affordable house price campaign PricedOut, welcomed the announcement. “For too long, buy-to-let landlords have been using an unfair tax break to outcompete first-time buyers and drive house prices further out of reach,” he said.
“For the Conservatives to be pro-homeownership it means they must take action against buy-to-let. We hope this excellent move to bring fairness to mortgage taxation will be just the beginning of the reforms needed to get the housing market into a fit shape for first-time buyers.”
The chancellor’s announcement came just hours after the latest house price index from Halifax revealed that the average property price jumped through the £200,000 barrier for the first time, jumping 1.7% over the last month alone.
But after the budget, property experts were hastily devising ways to skirt the new tax rules. Stuart Law of Assetz said: “Landlords investing through limited companies should avoid this new personal tax increase, making it sensible to consider investing in buy to let through a company.”
Share prices in mortgage lenders specialising in buy-to-let loans fell heavily after the budget speech. Paragon, which revealed this year that buy-to-let landlords had earned returns of almost 1,400% since 1996, saw its share price drop 5%. Virgin Money, which acquired Northern Rock’s business and is a major lender to landlords, was down 9% although this was largely due to a new levy on bank profits also anounced in the budget.
Letting agents, which have seen their incomes soar during the buy-to-let boom, could also be hit. George Spencer of letting agent Rentify said: “These cuts are set to affect British landlords in a drastic way. These reliefs were hugely important for landlords in being able to offset other astronomic costs such as high street lettings agent fees, home insurance, maintenance and repairs costs, as well as council tax.”
The private rented sector has grown dramatically in recent years, with one in five homes now owned by landlords. Research earlier this year predicted the figure would rise to one in three over the next two decades, but the pace of growth may now reverse. Landlords will not only enjoy fewer tax breaks, but they will no longer be supported by rising housing benefit.
Housing charity Shelter also warned that while it was good to see the removal of tax breaks for wealthy landlords, cuts to housing benefit will be a “huge blow” to millions of private renters.