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All About The Landlord Borrowing Trap

Known as the Osborne Tax ...


Posted by Helen Beaumont on 12/01/2022 @ 8:00AM

Some landlords are finding themselves in a borrowing trap with growing tax bills and are being forced to sell properties due to financial pressure from banks and other lending institutions ...

To mitigate the landlord borrowing trap, I'd strongly recommend you speak to your tax advisor for professional property advice!

To mitigate the landlord borrowing trap, I'd strongly recommend you speak to your tax advisor for professional property advice!

copyright: spaxia / 123rf

There is, however, a powerful new incentive, to sell all or a good part of a property portfolio and this is something known as the Osborne Tax. This is to do with the disallowance of loan interest relief on residential properties for high rate income taxpayers.

"This has resulted in an effective tax rate of more than 100% in certain cases!"

In a simple example, a property investor could assume that an increase in property value will go on forever. At the time of purchase, the lending institutions thought so too and now the investor is in negative equity.

Assuming a property portfolio of £1 million with gross rent of £50,000 per year, borrowing is £1.1 million and the interest on these interest-only loans is £44,000 a year once the low fixed rate term expires.

Whilst the investor's actual profit is £6,000 before expenses, his deemed profit is £50,000 which is the gross rents before interest. After basic rate tax relief, the tax due is around £11,000 which is larger than his actual profit.

"Can you see how this is financially unsustainable?"

So, the only way forward for the investor would be to sell property from their portfolio, but the Osborne Tax makes it quite painful. Especially if you are in negative equity, the Capital Gains Tax bill can be greater than the money made on the sale of the property.

Unless you have spare cash to hand, this borrowing trap leaves you stuck in an impossible situation. Circumstances could mean you're being forced to sell, but because of the tax, you may find it financially impossible to sell it.

"What can be done, apart from going bankrupt?"

I'd suggest that you should do an analysis to figure out which of your properties will produce the lowest Capital Gains Tax, which are probably your most recent purchases. Enough equity could solve the problem of not having enough money to cover your tax bill.

Another option would be to refinance part or all of your portfolio so you can pay off some or all of the loan on the property or properties you're selling. There could also be an option to convert one or more properties from a private rental into a furnished holiday let and gain tax relief that way. These are eligible for Entrepreneurs' Relief if it has been that way for two or more years. It could reduce your Capital Gains Tax from 28% to 10% which could be a considerable saving.

And finally, have you considered incorporating your entire portfolio into a limited company then claiming Incorporation Relief from Capital Gains Tax? This could be beneficial, but not something you want to do without advice.

"Is the Osborne Tax driving you to sell properties?"

If so, there are ways to mitigate the tax effects, and I'd strongly recommend you speak to your tax advisor for professional property advice before making any decisions.

Until next time ...



Would you like to know more?

If anything I've written in this blog post resonates with you and you'd like to discover more about the landlord borrowing trap, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.

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About Helen Beaumont ...


Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.