The summer Budget included substantial changes for the buy-to-let market, including a large crackdown on mortgage interest tax relief.
Under the changes outlined by Mr Osborne, the amount that landlords can claim as relief will be set at the basic rate of tax from 2017. At present, this is 20%. The Chancellor believes that this will, ‘level the playing field for homebuyers and investors.’
However, leading industry figures have expressed concerns that the buy-to-let market will slow in the wake of the changes, which will ultimately make property investment less attractive.
Mr Osborne’s proposed changes have caused differences in opinion within the industry. Brendan Cox, Managing Director of Waterfords, operational across Surrey, Hampshire and Berkshire, feels the changes will not have a substantial damaging impact.
‘I don’t think people will be put off,’ Cox commented. ‘Buy-to-let investment still offers a good opportunity for people to make money from capital growth and most people consider the long-term gain over the immediate income. There are still some good yields to be had on a monthly basis, and granted, landlords aren’t going to be able to make quite as much money, but the gains are so big in other areas I would be surprised if this rocked the market very much.’
Cox believes that, ‘in trying to cool the property market, the government may have created an ever bigger problem for tenants, because landlords may look to recoup some of the loss through rental income.’ He said that in his firm’s experience, ‘anything we take on the market is snapped up immediately,’ due a shortage of affordable homes. As a result, Cox feels that, ‘landlords could probably add an extra 5-10% and still find willing tenants.’
‘The most notable difference will be that elderly people, who previously might have downsized to divide up their funds in advance, will now remain in their homes safe in the knowledge their offspring will not have to pay a large tax bill upon their death,’ Cox concluded.
Brian Murphy, Head of Lending at Mortgage Advice Bureau, feels that the changes to buy-to-let mortgage interest tax relief could almost come as good news to landlords that feared it would be abolished completely.
‘Totally removing the tax relief could have led to significantly reduced profits for borrowers who pay above the basic rate of income tax, particularly as mortgage interest represents a significant proportion of landlords’ annual costs,’ said Murphy. He acknowledges that, ‘the decision to halve the 40% tax relief may not be popular but will be far easier for landlords to adjust to.’
Mr Murphy went on to say that the removal of mortgage interest tax relief, ‘could also have led to higher rents for tenants in order to help cover landlords’ financial loss.’ However, he feels that the gradual introduction of the restriction on tax relief from 2017 will give landlords, ‘plenty of time to forward plan how they will adjust to the changes without resorting to sudden hikes in rents.’
Concluding, Murphy said, ‘Landlords are often unfairly used as scapegoats for the problems facing the residential housing market. Although housebuilding has picked up recently, planning, provision of materials and suppliers and industry capacity is still at a relatively low level compared with the number of properties needed. The Government must now focus on a comprehensive long-term house building plan to work alongside wider plans for the economy.’