Setting out the changes in his Summer Budget, the Chancellor said buy-to-let investors unfairly presided over homebuyers with the ability to deduct costs from their profits before they paid tax.
For the wealthiest landlords, for every pound of mortgage interest costs incurred, 45p can be claimed back from the taxpayer.
Following the Bank of England’s warning last week that buy to let could pose a risk to the UK’s financial stability, Osborne said withdrawal of the higher rate of buy-to-let relief would begin first, with withdrawal itself to start in April 2017.
The announcement is one of three changes which Osborne said would “address unfairness” in how UK property is taxed. The Chancellor also went ahead with plans to take the Inheritance Tax threshold up to £1m for family homes.
The third announcement included amendments to the ‘rent-a-room relief’ scheme, which has grown in popularity as more homeowners rent out their spare room through online portal AirBnB.
Relief will now be raised to £7,500 after being frozen at £4,250 for 18 years.
Osborne said the changes would create “a more level playing-field between those buying a home to let, and those who are buying a home to live in”.
“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,” Osborne said.
“All this has contributed to the rapid growth in buy-to-let properties, which now accounts for over 15% of new mortgages, something the Bank of England warned us last week could pose a risk to our financial stability,” he added.
“So we will act – but we will act in a proportionate and gradual way, because I know that many hardworking people who’ve saved and invested in property depend on the rental income they get.”
Henry Woodcock, principal mortgage consultant at IRESS, said the move to cut landlord tax relief could “trigger unintended consequences”.
“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.”
He added that the move may not be an unqualified success for first-time buyers as intended.
“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.”