Business angels who lend for development as alternative to high street banks muzzled by Revenue

Friday, March 30, 2012 by Ed Mead

As we all know funding has become more and more of a problem for those seeking to develop property. As mainstream funders have dried up other sources have sprung up, many imaginative and altogether more flexible.

High net worth individuals have been seeking, since absolute returns plunged to zero or less once inflation taken into account, ways of using their money more effectively. What could be more useful than borrowing against their cash poor assets and lending the money to those seeking to rebuild and rehouse. It’s been a clever, and until last week, useful way of recycling money and putting often moribund assets to better use. It has become a widespread source of funding, both in the form of senior debt, ie first charge, and the more accepted top up finance also known as mezzanine finance.

Given the paucity of high street lending despite much trumpeting to the contrary, this has become a lifeline, particularly in London.

However, the Revenue in another ill-judged grab, have decided that these business angels will have the interest they can earn from qualifying loans made against their “moribund” assets, and passed on to those in need of funding, will be capped at £50k. Everything over that they’ll have to pay tax at 25% on.

So for someone borrowing against an asset at, say, 4% and passing on the loan at a higher rate, the “profit” on the interest is capped as a disincentive for them to lend out. This is against an individual in total, so you cannot lend through multiple vehicles, £50k profit is the limit.

Given the desperate lack of development funding for redeveloping run down areas and assets this would seem a retrograde step, and for London following the Stamp Duty debacle another disincentive for the wealthy to spend money in our Capital.

What is George Osborne up to.