TAX NEWS - June 2010

British Tax: British Property Federation warns of tax relief disaster

The British Property Federation (BPF) has warned chancellor George Osborne that removing commercial tax relief on debts would be 'disastrous'.

The British Property Federation (BPF), speaking ahead of tomorrow's budget, said many borrowers would be unable to make repayments if the relief was cut.

Such a move would put some borrowers out of business and could give rise to substantial new losses on bank balance sheets, it claimed.

BPF said many banks were turning a blind eye to breaches of loan-to-value covenants which make up about £50bn of the £300bn of debt existing against commercial properties.

It said this was because borrowers were able to keep up repayments despite huge falls in the value of their assets.

Liz Peace, chief executive of the The British Property Federation (BPF), said restricting tax relief for financing costs could be the last straw for many businesses managing to make their interest payments in challenging conditions.

She said: "Halving relief would increase the true cost of debt service by between 16 per cent and 20 per cent equivalent to a significant increase in interest rates."

"As well as making it more difficult to manage, restructure or refinance existing loans, increasing the cost of borrowing would reduce funding available for new projects.

"It is these new projects which will stimulate economic activity and create the jobs we need to climb out of recession."

Rupert Clarke, chief executive of Hermes and president of the BPF, said: "We urge the government to consult fully before implementing measures which will undermine the financing fundamentals of the whole real estate market.

"Given the significant exposure of the financial markets (including RBS and Lloyds) to commercial property, such a move will inevitably lead to a significant deterioration in UK credit ratings."