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Chancellor to quell the economic risk posed by the booming buy-to-let market

Landlords across the UK will be hit in the pocket after the Chancellor announced that he is reducing tax relief on private rented homes, in an attempt to quell the economic risk posed by the booming buy-to-let market.

Mr Osborne said the income tax relief enjoyed by landlords will be cut to the basic rate, which currently stands at 20pc. The measure, which will address "unfairnesses in property taxation", will be phased in "gradually" from 2017.

Buy-to-let landlords can offset their mortgage interest payments against their income, whereas homeowners who live in their properties cannot, he explained.

Only last week the Bank of England warned that people piling in to the buy-to-let market posed a risk to the financial stability of the country, inflating house prices up and reducing the number of homes available for first-time buyers.

The popularity of buy-to-let investments has been intensified by the pensions freedom initiative that came into force in April and enabled those over the age of 55 to withdraw their pension in one lump sum, with many choosing to sink it into rental property.

"Clearly this is going to make landlords put up rents and does nothing to resolve the bigger issues of a lack of housing supply and credit availability which is creeping up," he said.

Mr Emery said that landlords could incur losses on their buy-to-let property when interest rates eventually go up and converge with yields.

"At the moment there is a tonne of liquidity, low interest rates and yields are healthy, but if you are a high rate tax payer, when we come into a normal market, your effective tax rate could be in excess of 100pc on your profit."

He added that those people saving for their retirement by squirreling away the income they make from renting out a property will be livid.

Phil Nickin from the consultancy, Deloitte, agreed. “This measure will almost double the effective cost of borrowing for a taxpayer on the highest rate of tax. Currently interest payments of £100 only cost £55 after tax relief, but will cost £80 from 2020. A landlord who borrows at even a modest level might end up paying more in tax than he makes in profit.

Genevieve Moore, a partner at chartered accountants Blick Rothenberg, also slammed the move.

"This is likely to impact many of Britain's workers who have saved hard and invested in property to supplement their retirement. We could see a flood of buy-to-lets being sold as the squeezed middle bow out of the rental market," she said.

Loudly trumpeted at the weekend, Mr Osborne officially announced that the Government will scrap inheritance tax (IHT) on homes worth more than £500,000 for single dwellers and up to £1m for married couples.

From January 2017 the Chancellor will raise the inheritance tax (IHT) threshold from £325,000 per person to £500,000. This means that a married couple will be able to pass on assets worth up to £1m, including a family home, without paying any IHT at all.

Thousands of homeowners have seen the value of their properties soar in recent years, particularly in London and the South East, thanks to a buoyant property market. This has raised concerns for many about the amount of tax their estate will incur after their death.

Here's how much you will pay under the new regime.

Single person

Value of family home

Value of other assets

Value of the estate

IHT liability now

IHT liability from April 2017

£175,000

£175,000

£325,000

Nil

Nil

£200,000

£300,000

£500,000

£70,000

Nil

£250,000

£400,000

£650,000

£130,000

£60,000

£400,000

£600,000

£1,000,000

£270,000

£200,000

£750,000

£750,000

£1,500,000

£470,000

£400,000

£1,000,000

£1,000,000

£2,000,000

£670,000

£600,000

Married couple

Value of family home

Value of other assets

Value of the estate

IHT liability now

IHT liability from April 2017

£175,000

£175,000

£325,000

Nil

Nil

£200,000

£300,000

£500,000

Nil

Nil

£250,000

£400,000

£650,000

Nil

Nil

£400,000

£600,000

£1,000,000

£140,000

Nil

£750,000

£750,000

£1,500,000

£340,000

£200,000

£1,000,000

£1,000,000

£2,000,000

£540,000

£400,000

However, this move could suppress home sales in the housing market, which are already slowing.

Recent research found that British homeowners live in the same property for an average of 17 years. The length of time we stay in one place has increased 25pc since 1980 and has led to rising house prices, according to analysts at property group JLL.

"The scrapping of IHT up to £1m feels right and stops a double taxation that I am uncomfortable with. However it could have a distorting effect on the market in the sense that people will be more willing to hang on to a family home for longer and it dilutes the desire to pass down capital or to downsize," said Adam Challis, head of residential research for JLL.

"It could run against some other policy straps the Government are pushing on," he said referring to other proposals that help people get on the home ownership ladder.

NFU Mutual warned that 30pc of all homes are undervalued, which could lead to a shock inheritance tax bill upon the death of the homeowner(s).

Around 80pc of £1m homes sold in England in Wales in the past 15 years are in London and the South East but there are concentrations of expensive homes across the rest of the country, including Gloucestershire, Cheshire and Dorset, the rural insurer reported.

"If you don't know how much your home is worth, then there's a real danger that you and your family could lose out," said Nicki Whittaker, director at NFU Mutual.