'Emergency Budget', Chancellor George Osborne set out various reforms to the housing market to create 'a more level playing-field between those buying a home to let, and those who are buying a home to live in'.
In what Osborne promised would be 'proportionate and gradual' action, the government will now restrict mortgage interest relief on residential property to the basic rate of income tax for buy-to-let investors.
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. For the wealthiest, every pound of mortgage interest costs they incur, they get 45p back from the taxpayer.
The government will restrict the relief on finance costs that landlords of residential property can get to the basic rate of income tax. The restriction will be phased in over 4 years, starting from April 2017. This will reduce the distorting effect the tax treatment of property has on investment and mean individual landlords are not treated differently based on the rate of income tax that they pay. It will also shift the balance between landlords and homeowners."
"All this has contributed to the rapid growth in buy-to-let properties, which now account for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability. 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."
Will rents rise as a result of BTL tax relief?
In Conclusion: The cut in mortgage interest tax relief to the basic rate for buy-to-let investors should concentrate the minds of anyone planning on becoming a landlord. Everyone likes a generous tax break but the reality is that landlords should not be investing simply for the tax relief and that remains the case after the Budget announcement. As the Chancellor said buy-to-let has been a massive success story and that should remain the case even after the Budget. Specialist lenders are committed to the market and there is still a strong case for expansion.
The reduction in tax breaks for landlords will make buy-to-let a much less attractive proposition, ultimately discouraging investment in the sector and reducing the amount of rental stock available, which will push rents up. With continued stress on the housing stock driving prices up, tough affordability hurdles for would-be buyers and a social rented sector under pressure as a result of renewed interest in right-to-buy, a increase in rental demand is practically inevitable.