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The Summer Budget included restrictions on mortgage interest relief for owners of rental properties, limiting the relief to the basic rate of tax. Under the current system individual landlords can deduct all of their costs, including mortgage interest, from their profits before paying tax. George Osborne believes this gives such landlords an unfair advantage over other residential property buyers. Here we benefit from an exclusive article from Susan Perry, Corporate Director at Brecher Solicitors to find out more.
Landlords who pay higher rate tax currently get the relief at 40% and up to 45% – this will be restricted to 20% for all individual landlords by April 2020. Corporate landlords are taxed differently and will be unaffected by the changes. The Conservative manifesto promised to double the number of first-time buyers, and with the introduction of Help To Buy ISAs the push to home ownership is an area on which the Government seem keen to deliver.
However, the Chancellor is comparing private landlords to first-time buyers – overlooking the fact that buy-to-let owners are running a business and should be entitled to reliefs in connection with financing and running that business. Restricting mortgage relief to the basic rate could make some lettings uneconomical for their owners, particularly once interest rates start to rise again. Such owners may decide to sell and the result could be a flood of former buy-to-let properties to the market.
On the face of it, this looks like good news for first time buyers, as more housing at the lower end comes on to the market, driving down prices. However, the difficulties in raising finance in the first place will remain, and properties are much more likely to be snapped up by fast-moving landlords with larger portfolios who can raise finance more easily than first-time buyers.
The impact on the housing market may not only relate to sales, or the ability of first-time buyers to compete with buy-to-let investors where supply of housing stock is short. In areas of high rental demand like London, the South East and big City centres landlords could seek to balance their own books by hiking rent to compensate for the loss of relief. If the market can take it, it seems an easy way to deal with the change.
Property remains an extremely popular asset class and in a time of still fragile economic recovery it seems unlikely that today’s changes will put investors off buy-to-let completely. The smaller landlords who have used their savings to purchase one or a small number of properties to rent privately may well be driven out of the market, but private individuals with a larger portfolio and small business owners looking to invest outside of their main business may not be deterred. Maybe it’s better to drive smaller investors, who are taking more risks in their one-off property investments, out of the market, allowing wealthier landlords to flourish, but that doesn’t chime with the rhetoric behind the change.
Pricing some private landlords out of the lettings market doesn’t automatically help first-time buyers or, indeed, solve the housing crisis.