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The gradual decrease of mortgage interest tax relief could drive out ‘amateur’ landlords from the property market and place £28bn into personal pensions, a provider has said.

One in five buy-to-let landlords are planning to sell up in the next five years due to policies impacting their profitability, such as the 3 per cent increase in stamp duty on second homes brought in in April 2016, and a phasing down of mortgage interest tax relief to 20 per cent, according Aegon.

This could lead to landlords beginning to re-think their investment strategy, the provider said.

According to Aegon, the average property price sits at £225,000, meaning if a landlord releases one quarter of this upon selling the property, they could pay £56,250 into a personal pension net of tax. For higher taxpayers, this turns into £93,750 after claiming tax relief.

While there is a cap of £40,000 on how much can be paid into a pension each year tax free, those who have not used their allowance in the previous three years can catch up, meaning they can pay in up to £160,000, including tax relief.

Multiplying the £56,250 figure by the estimated 500,000 investors planning on selling equates to £28.1bn.

Steven Cameron, pensions director at Aegon, said: “The landscape for landlords has changed significantly in the last two years.

“Having a buy to let property has been seen by some investors as an alternative to saving in a pension. Investors turned to the property market in a bid to secure better returns as property values rose considerably, albeit with significant geographical variations.

“However, tax and regulatory changes and the prospect of rising interest rates is prompting 1 in 5 to consider selling.”

He said those holding property to fund their retirement in the first place may wish to put the money in a pension instead.

But Alistair Wilson, head of retail platform strategy at Zurich, said landlords should be wary of breaching their annual allowance limit, currently set at £40,000.

He said: “For many landlords, using the proceeds from a property sale to boost their pension is likely to make good financial sense, especially as they get a 20 per cent bonus in tax relief from the government.

“However, they should be wary of exceeding their annual allowance, or they will lose this top-up.”

Mr Wilson said one of the winners of any trend from property to pensions was likely to be investment platforms, which would see a boost in inflows as more and more people invest their pensions via platforms.

“We may also see a boost in demand for property funds, as investors seek a similar replacement for their bricks and mortar investment,” he added.

Phil Smith, director and group chief executive of provider Embark Group, said any tax policy influencing net yields could be expected to impact investor actions greatly.

He said: “Buy to let property investors have been progressively and negatively impacted in recent years, and it is only the low cost of debt that has kept them in the game.

“As debt costs rise, switching accumulated equity into pension contributions, taking eligible tax relief at source, and then investing into non-residential property is now exceptionally attractive when comparing like to like.

“We are seeing this in our pension books and have continued to build an sizeable property capability as a result.”

Source: FT Adviser

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