Rechargeable magnesium batteries provide the potential for lower cost and improved safety compared with lithium-ion batteries, however obtaining cathode materials with highly reversible Mg-ion capacities is hindered by the high polarizability of divalent Mg-ions and slow solid-state Mg-ion diffusion. We report that incorporating poly(ethylene oxide) (PEO) between the layers of hydrated vanadium pentoxide (V2O5) xerogels results in significantly improved reversible Mg-ion capacities. X-ray diffraction and high resolution transmission electron microscopy show that the interlayer spacing between V2O5 layers was increased by PEO incorporation. Vibrational spectroscopy supports that the polymer interacts with the V2O5 lattice. The V2O5-PEO nanocomposite exhibited a 5-fold enhancement in Mg-ion capacity, improved stability, and improved rate capabilities compared with V2O5 xerogels. The Mg-ion diffusion coefficient of the nanocomposite was increased compared with that of V2O5 xerogels which is attributed to enhanced Mg-ion mobility due to the shielding interaction of PEO with the V2O5 lattice. This study shows that beyond only interlayer spacing, the nature of interlayer interactions of Mg-ions with V2O5, PEO, and H2O are key factors that affect Mg-ion charge transport and storage in layered materials. The design of layered materials with controlled interlayer interactions provides a new approach to develop improved cathodes for magnesium batteries.