Government plans to strip buy-to-let landlords of mortgage interest tax relief have been branded ‘terrible’ by former Bank of England economist David Miles.
From April, landlords will start to lose the right to claim back their mortgage interest costs at the rate they pay income tax – currently up to 45 per cent. Instead, they will see this drop over the next three years and replaced with a 20 per cent tax credit.
Landlords have already slammed the move as disastrous, claiming it will result in rent hikes for tenants across the UK.
Now Miles, an eminent economist and former member of the Bank of England’s monetary policy committee, has dubbed it ‘a terrible tax change’.
Together with the introduction of a 3 per cent surcharge on stamp duty payable on buy-to-let purchases since April 2016, Miles has calculated rents would have to rise substantially to make up for landlords’ higher costs.
Speaking at an event in Westminster this week, Miles said: ‘If you are a landlord who is affected by both of these changes and you are a higher rate tax payer, then you might need your rental income to rise by somewhere between 25 and 30 per cent to maintain your return.
‘I don’t expect rents to go up by anything like as much as that, partly because tenants can’t afford it, but I suspect there will be a fairly chunky rise in rents.’
Miles also warned that the tax change would exacerbate the plight of would-be home owners trying to save for a deposit for their first home by forcing them to spend even more of their income on rent.
‘That makes life for those people who hope to be owner occupiers but are still in the rental sector unambiguously worse off,’ he said.
‘I think it’s a terrible tax change for what it’s worth, but we seem to be pushing on.’
The removal of tax relief on buy-to-let mortgage interest has been widely criticised by landlords, with the chairman of the Residential Landlords Association, Alan Ward, calling on the Chancellor to U-turn on the proposed changes earlier this week.
He warned that landlords, faced with significantly higher costs, will be forced to pass on at least some of the pain to tenants.
Recent research from buy-to-let lender Kent Reliance suggests a third of landlords expect to increase rents in the next six months by an average of 5.4 per cent – equivalent £571 per year for households.
Currently landlords are taxed on their profit because existing mortgage payments can be deducted from rental income before that income is declared.
A higher rate tax payer paying 40 per cent income tax can deduct their mortgage costs (buy-to-let loans tend to be interest-only) and therefore they pay only income tax on their rental income above that.
From April this tax relief – currently available up to 45 per cent for top tier taxpayers – will be reduced over four years down to 20 per cent.
It also won’t be a relief. It is being replaced with a tax credit which must be claimed back meaning landlords will find 100 per cent of their rental income is taxable and they are then in line for a credit payment of 20 per cent back.
It’s estimated that the changes will push half a million landlords into a higher income tax band – hitting their profits even harder.
For further information on how its worked out, including case studies visit: https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies?utm_source=HMRCBusiness&utm_medium=OwnedTwitter