Buy to Let Under Attack - Next 'Stealth Tax' Target
The buy to let market could be Chancellor Gordon Brown's next target in order to gain extra income while at the same time slowing the housing market down - a London firm of Chartered Accountants is suggesting.
Private investors could end up with an extra tax bill if the Chancellor reduces, disallows, or restricts, interest tax relief on buying properties to let.
Recent reports have indicated that Chancellor Gordon Brown's economic forecasts are looking increasingly unachievable and that Treasury Minister Paul Boateng has been tasked with reining in departmental spending. At the same time, the Chancellor will have to find new ways of increasing tax revenues and the buy to let market could be his next 'stealth tax' target.
"Over the past few years the Chancellor has employed various stealth taxes to raise income and balance the books," Said David Rothenberg, senior tax partner with Blick Rothenberg. "We now believe he may start to look at the buy to let market and reduce tax allowances on borrowing in an effort to raise extra cash and slow the market down at the same time."
David gave the following example: "Suppose someone buys a £100,000 property and gets an £80,000 loan at an interest rate of 5% then they pay £4,000 in interest. The rent receivable might be 5.75% on the purchase cost or £5,750 a year. If the Chancellor limits allowable interest to say only 60% of rents received then only £3,450 of the £4,000 is deductible so increasing taxable income by an extra £550 a year. At 40% marginal tax rate that would add an extra £220 to the investors' tax bill.
He added: "He could actually disallow all relief, but I think that is unlikely in the first instance. The impact if interest rates rise could be catastrophic, leaving a negative cash flow to such investors creating a new form of negative tax equity.
"Foreign investors who have bought property in the UK could be hit even harder," said Paul Willans, the firm's director of financial planning. "Many foreign investors have purchased commercial properties in the UK as investments. Typically such investors try to gear up as much as possible and with commercial property yields being so low the effect could be dramatic."
He added "It would be one thing to seek to raise extra taxes from the private property market and therefore slow it down, but it would be quite another from a commercial standpoint. The banks could find that the values of their security would fall and investors might start to look elsewhere. It is a fine balance."