Cherie Blair targets nasty buy-to-let interest rules

The Issue

 The terrible news is still slowly filtering down to landlords that the Government is out to get them. From 2017 a new tax regime will limit the tax relief that landlords can claim on financing costs (mortgage interest and allowable arrangement fees) to basic rate tax relief at 20%. This regime will be phased in as follows:

 

Year

% of costs deducted from profits

% of costs available as a basic rate deduction

2017/18 75% 25%
2018/19 50% 50%
2019/20 25% 75%
2020/21 100%

 

This means that by 2020/2021 tax liabilities will be calculated by reference to profits before financing costs, following which credit will be available at only 20% in respect of those costs. This will give rise to some horrendous results.

 

Example

Mr Rachman has a £100M property portfolio and this gives him rental income of £5M but he also pays mortgage interest 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 (from 2020/2021) he will go from having a nil tax liability to having a £1.25M tax liability. This is because tax will be calculated on 45% of £5M following which relief of 20% of £5M would be likely to be applicable. Where will he get this money from? Presumably he will have to sell some of his properties…..

 

Commentary

In our opinion this is little more than daylight robbery as HMRC are seeking to tax profits which don’t exist. Thankfully that nice lady called Cherie Blair is firmly in the corner of the taxpayer and will attend a meeting on 6 October at the Royal Court of Justice to see if she is going to be allowed to challenge the law. Her basis for objection rests on EU legislation that stops one kind of landlord being prejudiced from another. Here she is arguing that individual landlords are being put into an unfair position compared to corporate landlords, which seems to be a fair point. That is why everyone is (or should be) now considering incorporation more than ever but that is a different issue…..

There really needs to be some kind of U-turn on this legislation because otherwise Rachman (above) is going to be in more than a spot of bother. And hopefully Cherie’s Bristol flats are not too highly geared or she may have to put her hand in her pocket too!

 

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