For decades, the private rented sector has been providing much-needed homes to meet a growing demand for flexible accommodation. A healthy supply of rental properties keeps rents down, and tax relief on mortgage interest payments is a key way for the Government to incentivise investment.

However, as George Osborne, Chancellor of the Exchequer, today announced in his emergency budget, the landlord tax relief on mortgage interest payments will be cut in order to ‘create a level playing field’ between those buying a home to let and those buying a home to live in.

From April 2017, the relief will be reduced to the basic rate of income tax, which stands at 20%, whereas currently, buy-to-let investors can claim tax relief of up to 45%.

In his speech, Osborne said: “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….So we will act, and we will act in a proportionate and gradual way because I know that many hard-working people who have saved and invested in property depend on the rental income they get. We will retain mortgage interest rate on residential property but we will now restrict it to the basic rate of income tax.”

The scaling back of tax relief on mortgage interest payments could have a significant impact on the bottom line for many landlords who pay above the basic rate of income tax. This is especially true for those investing in single occupancy buy-to-lets with large mortgages and little opportunity to recoup this extra expenditure by increasing the rents they charge.

Mortgage interest payments can be up to 50% of landlords’ total annual costs. Those who currently receive 40% relief on their interest payments will now see this tax benefit halved, leaving profits after tax reduced. This change in tax law could therefore deter investment in the private rented sector and restrict supply at a time when demand for quality rented accommodation is high.

Steve Bolton, Founder and Chairman of Platinum Property Partners, the specialist buy-to-let business, said: “From a tenant’s point of view, such a move may force some landlords to increase their rents to ensure that they remain in the black and not in the red. Landlords hit hard by this change may also be driven to reduce general property improvements or maintenance which could worsen the standard of rented accommodation.

“However, depending on their business model some landlords will be able to cope with the changes better than others. The PPP model of letting high quality shared houses to young professionals and key workers is structured in a sophisticated, compliant and tax-efficient way and supported by a proven system and continued mentoring. This, coupled with the fact that the model is based on a high level of rental income that is up to three times higher than a standard buy-to-let, means that our Partners’ portfolios can withstand the changes to tax relief.

“The changes will be phased in gradually (over four years from April 2017), giving landlords plenty of time to plan ahead and assess how they can absorb these higher mortgage interest bills. For those landlords who don’t have a robust business plan, this could be the ideal time to get advice and education about the best way to structure their business.”