Buy To Let – What The Emergency Budget Changes Mean

In today’s (8th July 2015) emergency budget, George Osborn announced that the tax relief on privately rented buy-to-let properties is set to be reduced to 20%. At this moment in time, landlords are able to claim up to 45% of interest payments on mortgages as tax relief, something which has contributed to the large surge in buy to let properties over recent years. Of course, the fact that individuals are now able to retrieve lump sums from their pension pot has also helped, however being able to offset anything up to 45% (dependent on the tax band the landlord falls into) made buy-to-let a very attractive proposition.

Today’s budget saw the Chancellor announce that this tax relief will be reduced to just 20%, the basic rate and is intended to address “unfairnesses in property taxation” and is set to be phased in “gradually” from 2017.

The issue seen with buy-to-let is that this pushes up house prices as well as reducing the number of homes available for first time buyers. It’s no hidden fact that many of the properties bought by investors and landlords are towards the bottom of the property ladder (in order to be able to make a tidy profit when renting out to families, couples or individuals whilst keeping rent affordable) and, as such, George Osborn aims to try and create a more even playing field and help thousands more first-time-buyers get themselves onto the property ladder each year.

Of course, whilst that is indeed the intention, we wanted to take a look at what this could mean across both landlords, home buyers and those in rental accommodation following the rollout.

For Landlords

It is clear that the majority of landlords will not be happy with today’s announcement. For some, they could see the level of tax relief which they are able to claim on interest payments fall from 45% to 20%. Let’s say, as an example and for ease that their monthly interest amounts to £200. At 45%, borrowing would cost just £110 whilst following the changes this would cost £160. There’s a huge difference and for many landlords could be the difference between profit and a loss, especially when interest rates rise as they’re expected to do.

For those on the highest tax band, the cost of borrowing will now more than double and this could well prove not to be profitable at all.

For Home Buyers

Whilst it is intended that the changes will ‘level the playing field’ this may not necessarily be the case. Of course, it could well be that we see a surge of investment properties sold off over the coming years, however we are likely to see little change. Perhaps we could see the rate at which buy-to-let properties are being snapped up slow down a little, however in the grand scheme of things, it’s unlikely to make the positive impact upon the levels of available houses for first time buyers which is intended.

Of course, as a home buyer or specifically a first time buyers, however, it’s encouraging to know that there’s now going to be a far fairer level of competition out that and there’s potentially less of a risk of investors putting in higher offers than you can afford to simply because they’re able to claim 45% of interest as tax relief.

For Tenants

Those who today’s changes could affect worst is those currently in rental accommodation. If landlords are effectively seeing reduced profits once the changes come into force, they’ll want to make this back somehow and the most obvious suggestion is that they’ll increase rent. Over the coming years, we could see rent hit an all time high and many who even currently struggle to afford high rents pushed into a difficult position.

Whilst the changes, in theory, seem to have good intentions to try and help those looking to buy a home for themselves and their families, only time will tell what will happen for certain!