Are property investors stuffed?

The recent Summer Budget dealt a sledge hammer blow for property investors…………or did it?

The Issue

George Osborne has announced that financing costs for buy to let properties will only get tax relief at the basic rate of 20%. This measure will be phased in over the 4 years from 6 April 2017.

This will ultimately hit many buy to let investors hard and in some cases will effectively mean that they have to find funds to pay tax out of profits that they have not made.

Example

Mr Rachman has a £100M property portfolio and this gives him rental income of £5M but he also has financing costs of £5M. He is therefore commercially in a break-even position. Currently he pays no tax as his financing costs obtain full tax relief against his income. His other income takes him into the higher 45% rate of tax.

When the new rules kick in fully he will go from having a nil tax liability to having a £1.25M tax liability. Where will he get this money from? Presumably he will have to sell some of his properties…..

Is it all bad?

Not necessarily as if Rachman were to take tax advice then he would be asked to consider incorporating his property business into a company. This would have the following benefits:

  1. Any gains from disposal of the properties is rolled over into the shares.
  2. Restore the nil tax environment as full relief should be available in the company.
  3. Rebase properties for tax purposes so that they can be sold without a gain.

SDLT can be a cost of this type of transaction although it can often be reduced to nil depending on the precise circumstances.

Take home message

Buy to let investors need to be taking advice to plan their affairs now. Otherwise tax liabilities will creep up on them and burden them with tax demands that they may be unable to pay.

 

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