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Summer Budget: How will landlords be affected?

Posted on 2015-07-10

George Osborne first budget as Chancellor of a majority Conservative government included a number of measures that will affect the property industry and particularly the buy-to-let sector in the coming months and years. But how will it affect the nation's investors and landlords?

What was announced?

Tax relief cut for buy-to-let home buyers

Probably the biggest news for Britain's landlords was Osborne's announcement that mortgage interest tax relief for purchasers of buy-to-let homes is to be restricted to the basic rate of income tax, which currently sits at 20 per cent. The changes to the current system will be phased in over the next four years in a bid by the government to make home-ownership more accessible for first-time buyers and to even up the playing field between landlords and owner-occupiers. The majority of industry experts have criticised the move, saying that rental yields will have to keep pace for landlords to see returns comparable to those they have been receiving in the past couple of years.

Inheritance tax threshold increased

By 2017,the inheritance tax threshold will be increased to £1m for married couples. This move has been widely welcomed as a positive step in the right direction, allowing those owner-occupiers who have paid their taxes over the years to pass their property on to their children tax-free.

Rent-A-Room tax relief increased

Homeowners letting a room to lodgers will be pleased to hear that the tax-free Rent-A-Room limit has been increased from £4,250 to £7,500. This is another of George Osborne's measures which has been welcomed by many, with some commentators going as far as suggesting that it could significantly ease the burden on rental property stock as more homeowners will be encouraged to rent spare rooms to those in need of a place to stay.

High-earning social tenants to pay up in rent

Another policy which is aimed to level the playing field and make the system fairer for all, social tenants in England who earn upwards of £30,000, or £40,000 in the capital, will be made to pay up to the market rent.

Permanent non-domicile tax status to be abolished

After much debate in the lead up to the election, permanent non-domicile tax status will be abolished in April 2017 and in the meantime non-doms who own residential properties will pay the same tax as their UK counterparts. This measure has been praised by those who called for changes to the system before the election and see the changes as the fair way forward. Those opposed warn that it could deter some overseas investors from ploughing more money in to the UK property market, particularly in London.

Manifesto housing policies confirmed

George Osborne took the opportunity to confirm two of the Conservatives' key housing policies set out before May's election. The Help to Buy ISA, which will give first-time buyers the opportunity to receive up to £3,000 from the government, and the extension of the Right to Buy scheme to housing association tenants, which will see a further 1.3m social tenants given the opportunity to take a step on the property ladder, will both come into action from the autumn.

What did the Chancellor say?

"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.”

"All this has contributed to the rapid growth in buy-to-let properties, which now account for over 15 per cent 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 hard-working people who’ve saved and invested in property depend on the rental income they get."

How has the property industry reacted?

Well, it depends what policy you're looking at. Measures to reduce tax relief for landlords have been met with widespread disapproval, while increasing the inheritance tax threshold and raising the tax free limit for Rent-A-Room homeowners have been welcomed as progressive and positive moves.

Here is a snapshot of some of the property industry's biggest players' comments:

On the cutting of buy-to-let tax relief:

David Cox, Managing Director of the Association of Residential Letting Agents (ARLA):

“At a time when the supply of rental property is already struggling to meet demand, it is dangerous to try and reduce growth in the rental market.”

Shane Ballard, Lettings Director at Greene & Co.:

“Areas which return high rental yields could become increasingly competitive while other areas where the rental yield is much lower may see a fall in demand from landlords as they no longer see it as a worthwhile investment.”

Richard Donnell, Research Director, Hometrack:

“The changes to buy-to-let mortgages and mortgage tax relief for high rate tax payers will moderate housing demand, but this is unlikely to impact the growth in house prices as just one-in-ten housing sales is to a buy-to-let investor buying with a mortgage – 63% of rented homes are not encumbered by a buy-to-let mortgage.”

On the abolishment of non-domicile tax status:

Nicholas Leeming, Chairman of Jackson-Stops & Staff estate agents:

“It is vital that the capital retains its attraction to non-doms. The stricter rules, while having some merit, will inevitably further dampen demand from international buyers in central London where the market for higher valued properties has already slowed sharply following last year’s changes in stamp duty.”

Liam Bailey, Global Head of Research at Knight Frank:

“These reforms follow a series of changes in recent years that make it increasingly difficult to argue prime residential property is under-taxed. The relatively subdued nature of the prime London market since December’s stamp duty changes highlights the risk of higher taxation on market demand and also Government revenues.”

On the increased inheritance tax threshold:

Nick Barnes, Head of Research at Chestertons:

“Changes to inheritance tax are welcome, as for most people the family home is the main source of equity. 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.”

Russell Quick, founder and CEO of eMoov:

“The abolition of inheritance tax up to the £1m has thrown many a small bone. Personally I feel it an outrage anyone should have to pay tax to pass their estate to the next generation of their family, regardless of the value of it, having paid tax on it in various government guises throughout their life.”

Ed Heaton, Heaton & Partners:

“Inheritance tax has been stuck in a time warp for far too long whilst the elderly have increasingly been required to squander their savings and assets in their old age to pay for the failings of the state, which they so generously supported in the past. This goes some way to redressing the balance.”

On the increased tax-free limit for Rent-A-Room homeowners:

Matt Hutchinson, director of

“The Chancellor’s change to the Rent-A-Room scheme has potentially huge implications for the scarce supply of affordable rented accommodation. 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 homeowners.”

What are the implications for landlords?

While the cutting of tax relief on buy-to-let purchases will be considered as a bit of a blow for many of the UK's landlords, there will be plenty who remain upbeat after the Summer Budget. Tax relief has been handed to those inheriting properties as well as those renting rooms in their homes to lodgers, which could well have a positive impact on rental property supply, helping to keep rental growth at strong but sustainable levels. 

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