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Osborne's tax-relief cut for landlords 'could lead them to put up rents' Rent rises forecast after Osborne's tax-relief cut for landlords
(about 4 hours later)
A cut in the tax relief available for buy-to-let landlords could lead them to push up rents, it was claimed on Wednesday. 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.
The budget announced plans to reduce the amount of tax relief investors can claim on mortgage interest payments, in a move the chancellor said would level the playing field for homebuyers and investors. 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.
However, experts suggested that aspiring first-time buyers could end up paying higher rents as investors looked to recoup lost profits. 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 amount landlords can claim as relief will be set at the basic rate of tax, currently 20%, with the change introduced over a four-year period from April 2017. 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.
Related: Budget 2015 live: Osborne announces new national 'living wage' of £9 an hour 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.”
Currently, investors can claim tax relief on their monthly interest repayments at the top level of tax they pay, meaning some are benefiting from relief of up to 45%. The relief is estimated to cost £6.3bn a year, and critics have said it gives landlords an advantage over first-time buyers. 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.
In his budget speech on Wednesday, George Osborne said: “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.” 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.
He 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.
“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 added.
The budget document revealed that a second raid on landlords’ tax breaks is planned from April 2016, when the current system that allows those to claim 10% of their rent for wear and tear will be scrapped. From that date, landlords will only be able to deduct costs they actually incur.
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.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.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.”“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.”
Adrian Anderson, director of Mayfair-based mortgage broker Anderson Harris, said the changes were not as bad as landlords had feared. 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.
“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,” he said. 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.”
“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.” 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.
Related: Budget 2015: 25 key points at a glance 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.”
However, Robert Walker, real estate partner at PwC, said the changes did nothing to address the fundamental lack of supply in the UK housing market and could ultimately backfire on tenants. 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.
“We could see buy-to-let investors feeling the squeeze and putting up rents. This would have a major impact on Generation Rent. Moreover, if interest rates increase over the coming years, and rental yields don’t keep pace, investors could be paying tax on a loss,” he said. “The chancellor is concerned about the level of funding in the buy-to-let market but today’s proposals don’t tackle this head-on.” 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.
The property website eMoov said that, based on average rents, landlords could be up to £2,000 a year worse off as a result of the change. Its founder, Russell Quirk, said: “I can only see the result being an increase in rental prices which in turn further hampers those trying to save to get on the property ladder.”
Peter Mackie, senior partner at buying agent Property Vision, said time would show if the rental market could support further price increases. He added: “We are not expecting this to have an adverse effect on the buy-to-let market or the overall appeal of investing in the property market.”
Osborne also announced an increase in the amount of money homeowners can earn in rent from lodgers before they face a tax bill. The maximum amount covered by the rent-a-room scheme has been set at £4,250 for the past 18 years, but will rise to £7,500 from April 2016.