Home owners to feel the squeeze

Nic Cicutti expects leaks of Budget cuts in mortgage tax relief to ring true
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The Independent Online
Two years ago, when the housing market was still in crisis Kenneth Clarke, then Chancellor of the Exchequer, was forced to retreat from his government's policy of gradually cutting back the tax relief granted to mortgage borrowers. Indeed, rumours were rife that he was preparing to scrap, or at least reduce, the 1 per cent stamp duty levied on all home purchases of over pounds 60,000.

Tomorrow, if a rush of leaks are to be believed, the new Chancellor, Gordon Brown, is not only preparing to carry on the work of his predecessor but take it one stage further.

Either mortgage interest relief at source - Miras - will be scrapped or its benefit will be lowered from the existing 15 per cent rate to 10 per cent on all loans of up to pounds 30,000. Each 5 per cent reduction in Miras would add pounds 10 a month to the cost of a loan of pounds 30,000 or more, with abolition therefore costing pounds 30 a month more for the United Kingdom's 10.5 million mortgage borrowers.

At the same time, it is believed that Mr Brown will announce a doubling of the stamp duty on each house purchase to 2 per cent, tempering the move by raising the threshold to pounds 100,000. This would double the duty paid on a pounds 150,000 home from pounds 1,500 to pounds 3,000. However, the Government is bound to argue that the raised threshold means far fewer properties in London and the South-east will fall into the net with only more affluent buyers being caught.

The reduction and ultimate abolition of Miras will kill two birds with one stone, as far as the Chancellor is concerned. It would help in the process of cooling down the UK's rapidly overheating housing market, which has seen average prices over the past 12 months rise by 11 per cent, according to the latest survey by Nationwide Building Society.

With the cost of a typical pounds 50,000 repayment mortgage having already risen by more than pounds 30 to about pounds 360 in the wake of the past few weeks' two base-rate rises, reigning in Miras to 10 per cent would add a further pounds 10 to the bill, dampening a stampede which has seen as many as 10 would- be purchasers chasing homes as they come onto the market.

Mr Brown's move also has the potential to raise considerable sums of money towards Treasury spending plans. Each downward notch in Miras - top 10 per cent, 5 per cent and outright abolition - adds pounds 900m to government coffers, pounds 2.7bn if the manoeuvre were completed in one fell swoop. Doubling stamp duty to 2 per cent could raise as further pounds 2bn, according to some calculations.

Although Baroness Thatcher, while still Prime Minister, was a formidable defender of tax relief on mortgages, gradual cuts in Miras were introduced even in her reign, limiting its availability to just one borrower. It was cut further by Mr Clarke, from 40 per cent to 25 per cent for borrowers in the top tax bracket, then down to 20 and finally 15 per cent. Mr Clarke's hand was only stayed in 1995 when the housing market was in a dire state. Indeed, some lobbyists confidently predicted that year that Mr Clarke would heed their call for stamp duty to be scrapped. Gordon Brown shows no sign that he has heard their plaintive cries this time round.

While mortgage lenders will protest at the increased costs for home owners, they have been bracing themselves for such an eventuality for months. In late May, Shelter, which campaigns against homelessness, and the Halifax, then still a building society, produced a report calling for tax benefits to be targeted mainly at first-time buyers on low incomes. While the Halifax denied it was abandoning its backing for Miras, many experts interpreted the report that way.

Budget preview, page 22

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