Chancellor George Osborne has announced that mortgage interest tax relief for buy-to-let homebuyers are to be restricted to basic rate of income tax, currently 20 per cent.

He says the measure, which will address “unfairnesses in property taxation”, will be phased out “gradually” from 2017. 

“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” Osborne told MPs. 

“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 hardworking people who’ve saved and invested in property depend on the rental income they get” he said.

This is only one of a number of property-related measures introduced by Osborne in the Budget, but undoubtedly the most controversial. 

“This a major blow to a sector that is heavily reliant on private investors and who provide a crucial supply of property to the private rental sector” says Nick Leeming, chief executive of Jackson Stops & Staff.

“We were disappointed to hear of the reduction in tax breaks for buy to let investors as this will discourage new landlords from entering the sector and will result in a lack of stock. This will inevitably lead to higher rents as at the end of the day landlords are business people and will need to compensate for this” says Glynis Frew, managing director of Hunters Property Group.

However, some market analysts feared worse. “There had been fears among landlords that relief on mortgage interest payments for buy-to-let landlords would be completely abolished so while the changes will hit higher-rate taxpayers – retaining mortgage interest relief but restricting it to basic rate tax – it is not as bad as it might have been” says Adrian Anderson of property finance specialists Anderson Harris.

Short-lets – including by those undertaken by Airbnb-style amateur landlords – received a boost because the Chancellor also announced that after 18 years the Rent-A-Room tax-free earnings limit would rise from £4,250 to £7,500 per year.