Perhaps the most controversial announcement by Chancellor of the Exchequer George Osborne was a cut in tax relief on mortgage interest payments for buy to let landlords which some believe will ultimately lead to higher rents. The Chancellor also, as expected, increased the rate at which inheritance tax will be paid on a home to £1 million and increased room rental tax relief to £7,500 per annum.
Although phased in from 2017 to 2020, the buy to let tax change will make investment a less attractive proposition for landlords. Indeed, it will discourage investment in the sector which could lead to higher rents and less rental homes available, according to Graham Davidson, managing director of Sequre Property Investment.
‘This is an example of politicians not understanding how the market operates, directly contradicting their apparent goals for an improved private rented sector. Landlords should be free to deduct legitimate costs, just like any other business does,’ he pointed out.
Gráinne Gilmore, head of UK residential research at Knight Frank, described it as ‘a significant change in tax status’ for those with a rental portfolio. ‘Those planning to purchase a buy to let property will have to factor these new rules into their calculations, and this could affect the offers they are willing to make,’ she said.
'If the relatively low yield environment seen today, especially in the South of England, is still evident when these changes start to come into force, there could be upward pressure on rents. The need for rental accommodation is strong, and we expect this trend to continue, especially in city centre markets around the UK,’ she added.
Jamie Morrison, private client partner at HW Fisher & Company, believes it will lead to higher rents. ‘It will cause many landlords increasing pain which will quickly be passed on to tenants in the form of higher rents. Highly leveraged landlords could pull out of the market too, reducing the supply of rental properties and ratcheting up rents even further,’ he said.
According to Russell Quirk, chief executive officer of online estate agent eMoov, landlords are going to be up to 20% worse off as previously enjoyed tax relief rates of up to 45% disappear. ‘Based on the average rent they could be up to £2,000 worse off each year. 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,’ he explained.
Henry Woodcock, Principal Mortgage Consultant at IRESS, pointed out that buy to let has been the key area of growth in the mortgage market and changing its tax treatment is likely to dampen mortgage activity and demand from property investors, which will hit overall lending figures.
‘Equally, we may see a number of landlords leave the market if their costs rise, which in turn will lower the potential revenue of the move. While this may slow house price growth, it may not be an unqualified success for first time buyers. For those landlords that remain in the market, they may need to increase rents to cover increased financing costs, and higher rents will make it more difficult for prospective buyers to build their first deposits,’ he added.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said that while reducing landlords’ mortgage tax relief is likely to prove a populist measure, the idea that tax benefits have been a big driver for growth in the private rental sector is flawed.
‘Unlike home owners, private landlords are still subject both to capital gains tax and tax on rental income, subject to allowable deductions for most costs. It also overlooks the fact that two in three properties entering the private rental sector since 2007 have done so without the support of buy to let mortgages,’ he explained.
‘Anyone expecting this change to result in a great levelling of the playing field in the housing market is destined to be disappointed. Following comments from the Bank of England last week, it is also a worrying sign of the growing trend to talk down buy to let and the private rental sector, rather than address the chronic lack of housing that is putting such pressure on first time buyers as the UK population grows,’ he added.
However, Peter Mackie, senior partner at Property Vision, does not think it will have an adverse effect on the buy to let market or the overall appeal of investing in the property market.
When it comes to the inheritance tax change, Steve Wilkie, managing director, equity release provider Responsible Life, pointed out that it will benefit families in the north more than the south, where average house prices are much lower.
‘But a large number of homeowners across the UK will still be better off and hardworking people will finally see more fruits of their labour passed onto their children and grandchildren, and not into the tax man's pocket,’ he added.
According to Dean Mirfin, technical director at over 55s specialist Key Retirement, said it will enable many retirees to more effectively plan their estates and to secure greater protection for what for many is their most valuable, or only real, asset.
Lucian Cook, head of Savills UK residential research, said the change will be of the greatest benefit to mature home owners in London and its hinterland.’ While many older home owners will welcome the changes to inheritance tax, the downside could be to encourage those in the high value areas to continue to hold onto their homes for longer, irrespective of the ability for downsizers to carry forward the increased inheritance tax allowance,’ he explained.
‘Downsizing is critical to the efficient use of our housing stock and recycling housing wealth between generations, which is an important means of helping younger households get on or trade up the housing ladder,’ he added.
Nick Barnes, head of research at Chestertons, pointed out that many average households, especially across London, have typically suffered a 40% reduction in their inheritance largely because of inflated residential property prices. ‘This change should allow people to leave a more substantial legacy to their loved ones, which will mean easier access to the property market for many,’ he added.
The room rental tax threshold increase from £4,250 to £7,500 will help boost the amount of more affordable rental accommodation, according to Matt Hutchinson, director of flat and house share site SpareRoom.co.uk. He pointed out this is the first increase for 18 years.
‘In the midst of a housing crisis, and with building levels behind all forecasted targets, it’s vital we make better use of existing stock and this will do just that. All too often housing initiatives benefit a select few but this helps millions of renters and home owners,’ he said.
‘There are an estimated 19 million empty bedrooms in owner occupied properties in England alone. Freeing up just 5% of those rooms would accommodate almost a million people, the equivalent of a city the size of Birmingham,’ he explained.
‘Encouraging people to take in lodgers could help them avoid repossession when interest rates rise and their mortgage repayments are adjusted. Lodger landlords can earn, on average, £8,335 per year in London, and £6,071 across the rest of the UK,’ he added.
