Brown scraps tax relief for homebuyers

The Chancellor of the Exchequer, Gordon Brown, will slash mortgage interest tax relief for home-buyers in his Budget on Wednesday to choke off a housing boom that threatens to overheat the economy.

In Labour's first Budget for 18 years, he will reduce sharply or even announce the phased abolition of the long-standing benefit for owner- occupiers. Home-buyers will have to find up to pounds 30 a month more.

Mr Brown is also looking at increases in stamp duty on house purchases to bring in extra revenue and damp down soaring home prices in many regions. It is thought he could raise the pounds 60,000 threshold at which stamp duty becomes payable but then double, to 2 per cent, the rate at which it is charged.

The Treasury decision to go for the housing boom hardened last week after the publication of figures showing the economy was growing faster than expected, fuelled by a High Street spending frenzy linked to home-buying.

The Chancellor will reduce the scope of mortgage interest tax relief, currently worth pounds 30 a month to home-owners, and is expected to signal an end to the owner-occupiers' "perk" that Margaret Thatcher always protected from Treasury attack.

However, he has the support of influential bodies, such as the Institute of Directors, which have urged him to get rid of the state "subsidy" of mortgages which distorts savings decisions. Abolition would bring in an extra pounds 2.3bn a year, though the benefit could be phased out rather than abolished in one fell swoop.

The monthly cost of a pounds 50,000 repayment mortgage with 15 per cent tax relief on interest is pounds 358.86. This rises to pounds 368.79 with relief at 10 per cent, pounds 378.74 with relief at 5 per cent and pounds 388.66 with no relief.

Stamp duty kicks in at pounds 60,000 but the Chancellor could increase this threshold to perhaps pounds 100,000 and then charge 2 per cent. House prices above this level, particularly in London and the South-east, are rising fastest and such a move would have a dampening effect.

Apart from mortgage tax relief, Labour's "budget for the long term to equip Britain for the future" will impose the long-heralded windfall tax on the privatised utilities, including British Telecom and BAA, the airports company. It will raise an estimated pounds 5bn in a one-off levy to pay for Mr Brown's welfare-to- work programme, aimed at getting 250,000 young people and long-term jobless out of the unemployment figures.

The Chancellor will also redeem his election pledge to reduce VAT on domestic fuel from 8 per cent to 5 per cent and could take specific steps towards his promise to introduce a 10p-in-the-pound starting rate for income tax. The VAT cut will take place before the winter and the estimated pounds 400m cost will be paid for by the abolition of tax relief on private medical insurance for the over-60s.

Mr Brown could take more money out of the nation's pay packets by altering the ceiling on National Insurance contributions. Contributions are levied at 10 per cent on earnings up to pounds 24,180. Anything above that ceiling is exempt.

Senior party sources expect at least two "green" taxation measures, including a substantial increase in fuel excise duty.

Other plans could include the taxation of company car-parking perks.