Home buying and Tax relief

Required Reading


Home buying and Tax relief

This concession is not unlimited; it applies only to borrowers who are going to use the loan to buy their main residence (in other words, it is not allowed for second homes or holiday cottages) and it is limited to the first £230,000 of any loan.

This limit was raised, after continuous lobbying by house-builders and the Building Societies Association among others, only in the 2008 Budget. For most first-time buyers, this limit is of little relevance, because they are unlikely to be borrowing in excess of £230,000.

According to the Building Societies Association, 19% of first-time buyers in 2012 actually earned less than £26,000 a year -and nearly 80% of them were earning less than £24,000; all but a handful (4%) bought a property that cost less than £132,000.

There is, nevertheless, something ominous about the manifest reluctance of the Government to raise the limit in the last few years and the fact that they have not now raised it further. When it was raised to £125,000 back in 2004, it was more than ample for the great majority of house-buyers. The average house price in that year was only £111,100, around 45% of the limit.

Today, the average house costs around £124,300 -already more than 80% of the limit, while in the more expensive areas of London and the South-east the average price is already in excess of £130,000. So perhaps it is worth bearing in mind that, with the next move you make, some of your borrowing may well be more expensive.

While we are looking into the future, we might as well consider the prospects of this tax relief remaining. Most commentators think it unlikely that the relief will ever be withdrawn in one fell swoop: the `death by a thousand cuts' is a much more politically acceptable alternative. In other words, the limit will be allowed to remain, but to become worth relatively less and less as house prices rise.

The position for higher-rate taxpayers is less certain, however. At the moment, relief is allowed against your highest rate of tax -which means that the richer you are the more you benefit from it, not a principle which fits into a progressive system of taxation.

So if we are laying odds on future changes in the system of giving tax relief to house-buyers, the withdrawal of higher-rate relief must be

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Concessions for home-buyers

In addition to keeping an eye on the mortgage interest rate, there are other important ways in which successive Governments have encouraged the growth in private ownership over the years. Two measures in particular stand out, which we shall now consider.

The first is the tax concession whereby interest on loans for the purpose of house purchase qualifies for tax relief, and the second is the exemption from capital gains tax of the profits made from selling your main home.
. . .... see: Concessions for home-buyers

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