New measures designed to restrict tax avoidance by large multinationals could also hit the profits of property investors. Under proposed plans, the ability to offset your tax bill with all finance interest payments is to be capped to between 10% and 30% of profits.
This would result in higher tax bills for some and would particularly impact on real estate companies who often carry a high level of debt.
REIT companies could also be affected given that whilst they do not pay tax they are required to distribute 90% of their tax-exempt profits. This would mean that if a portion of their interest payments were not tax deductible dividends would increase against a possible drop in the actual returns being made.
”In recent years, Capital Allowances has been seen as one of the few legitimate ways in which companies and individuals can look to mitigate tax”
As with the general property market, the way in which property is financed goes in cycles and in the current market of relatively low loan to values it has already created a widening gap between income receipts and the allowable tax deductions. So any talk of reducing the ability to fully deduct for loan interest payments should be a concern for some.
This coupled with the current trend of rising rents means that this gap is only likely to widen further, with tax becoming an increasing cost to investment returns.
In recent years, Capital Allowances has been seen as one of the few legitimate ways in which companies and individuals can look to mitigate tax on property. This is set to continue and Capital Allowances will be of greater importance should this measure get the green light.
Capital Allowances also offers investors the added flexibility of being able to claim from day one, whilst being able to roll any unclaimed allowances forwards to a future period, when there is often a greater need to mitigate tax. This will allow investors to adapt to changing market conditions and future proof against those unforeseen changes, such as the one being proposed.
This change is part of wider consultation on the tax deductibility of interest expense, with the deadline for responses by 14 January 2016, with any new rules planned to come into force on 1 April 2017.