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Warning of tax threat to buy to let

Chancellor Gordon Brown may be forced to target the buy-to-let market to raise tax revenues to meet his economic forecasts, according to accountants Blick Rothenberg.

It says a decision to reduce, disallow or restrict interest tax relief on buy-to-let property would mean private investors getting an extra tax bill in a move which Brown would hope would cool the housing market down.

An example of an £80,000 loan on a property worth £100,000 at an interest rate of 5 per cent would mean £4,000 being paid in interest each year.

If the Chancellor limits allowable interest to 60 per cent of rents received and the rental income is 5.75 per cent of the purchased value of the property, then only £3,450 would be tax-deductible. Effectively the investor&#39s taxable income would rise by£550 a year.

Blick Rothenberg says it is unlikely that interest tax relief will be disallowed altogether. However, the impact of an interest rate rise would hit investors concerned with a new form of negative equity being created.

Director of finance planning Paul Willans believes it would be one thing to focus on the private property market but quite different to target commercial property. Banks could see the value of their security fall and investors could look elsewhere.

He says “Foreign investors who have bought property in the UK could be hit even harder. Many foreign invest-ors have purchased commercial properties and, typically, such investors try to gear up as much as possible and, with yields being so low, the effects could be dramatic.”

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