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Property investors hit by sneaky tax rise

30th Aug 2016
Tax Writer Taxwriter Ltd
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From 5 July 2016 gains from selling UK property can be subject to income tax at up to 45%, rather than CGT at 18% or 28%. 

Tax hike

A significant change was made to Finance Bill 2016 during the committee stage held in July, which could increase the tax payable by thousands of individuals and companies who have invested in UK properties. Normally such investors expect any profits they make on selling properties to be taxed as capital gains and be subject to capital gains tax (CGT), but where the new law applies the profits will be subject to income tax or corporation tax.

Individuals pay CGT at 10% or 20% (basic or higher rate taxpayers) on gains from commercial property, and CGT at 18% or 28% on gains from residential properties. If the same profits are subject to income tax, the tax is payable at 20%, 40% or 45% plus national insurance at 9% or 2%.

Companies pay corporation tax at 20% on all income and gains. But companies (not individuals) can deduct the indexation allowance when calculating the amount of taxable gain, which may significantly reduce the amount which is subject to tax. 

When it bites

If the Finance Bill 2016 is passed as it stands, profits from UK property sales made on or after 5 July 2016 will be taxed as trading income (subject to income tax or corporation tax) if any of the following conditions apply: 

A. The main purpose or one of the main purposes in acquiring the land was to realise a profit or gain from its disposal

B. The main purpose or one of the main purposes in acquiring the property which derives its value from the land was to realise a profit or gain from the disposal of the land

C. The land is held as trading stock

D. The main purpose of one of the main purposes of developing the land was to realise a profit or gain from disposing of the land when it is developed

Taxpayers who buy properties to develop them then sell on (as in D above), will treat those properties as trading stock (as in C above). Such developers shouldn’t be affected by this new law as they should already be treating profits from selling properties as income rather than gains. Taxpayers who buy properties, hold them while the market improves, then off-load for a profit will be caught by conditions A or B.  

However, landlords who buy properties to let out and then sell those properties for a profit some time later could also be caught by conditions A or B. It is going to be difficult for landlords to prove that one of the main purposes for buying a property was not to realise a gain from its disposal, unless the property is let out for some considerable time.

No guidance

These proposed tax changes were introduced into Finance Bill 2016 as new clauses 75 to 81 with no warning. I can find no announcement explaining why the law needs to be changed [Edit: I have now found the TIIN for these new clauses which says the legislation is introduced to ensure that offshore structures can't be used to avoid UK tax on dealing in or developing UK land. However, the law is not restricted to offshore structures and applies equally to UK based property investors.]

There is no guidance on the new law from HMRC, although it is clear that guidance will be needed to determine when a taxpayer will fall within conditions A or B.  

Wide application

If you are thinking that a landlord could get round the income tax charges by passing on the property to an associate, that won’t work. The new law will catch not only the property owner, but can also any person who is associated with the owner at a relevant time around the disposal, or a person who is a party to an arrangement which enables profit to be realised from the land by any indirect method or by a series of transactions.

The only exemption I can see is where the property concerned is a private residence which is exempt from CGT due to the operation of the main residence exemption.

What to do

It not too late to lobby MPs about this change, as the Finance Bill 2016 will be discussed in the House of Commons for its report stage on 5 and 6 September.

 

Please let us know what you think of this new law by commenting below. Remember it applies to disposals made on and after 5 July 2016.

Replies (44)

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By ireallyshouldknowthisbut
30th Aug 2016 14:27

Rebecca,

I think your sense of alarm here may be out of proportion to the intention of this legislation.

Surely the main purpose of being a landlord is to obtain a rental income stream?

Any capital gain is just a bonus, and quite frankly if you are chasing the latter and not the former you are going to face problems.

Moreover if you are "buying and selling" in the short term, generally the costs of purchase and sale will kill any short term capital gain UNLESS the main purpose was either (a) to speculate on house price movements, or (b) to buy a run down property, renovate, let for a notional 2 years and sell on as a 'disguised' capital gain, when it is really a refurb.

We just need some practice notes and a rule, such as "if its let for 60 months its a lettings business". Few genuine landlords buy and sell inside of 5 years.

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By MargaretThornton7
30th Aug 2016 14:39

It seems wrong that this was added quietly at committee stage and applies from 5 July 2016. Surely at the very least it should have been subject to a proper announcement by the Treasury - Oh I remember the conservative party were all busy choosing a new prime minister so there was effectively nobody at The Treaury. Great time for HMRC to slip this in under the radar!

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Replying to MargaretThornton7:
By Brian Ogilvie
13th Sep 2016 12:45

Margaret
In fairness to HMRC (!) the measure was indeed announced at Budget 2016 - but not included in the original Finance Bill due to (I presume) shortage of time

https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

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Stepurhan
By stepurhan
30th Aug 2016 17:33

Editorial note. You have listed the conditions as 1 to 4, then referred to them as A to D in the subsequent paragraphs.

As for the change itself, I foresee some highly contested case law on this one. If HMRC try to classify a single transaction as trading, I don't see it as a given that they will be able to do so simply because of this rule. Surely they will have to provide some evidence of it being a main purpose (though I still think "divine the taxpayer's thoughts" rules like this one are very sloppy legislation regardless).

On the flip-side, if they do start classifying single transactions as trading, do they not risk undermining their stance that other low activity businesses are not trading. It seems like HMRC want to have it both ways.

Just out of interest, do you know why 5 July 2016? It would make more sense for it to take effect at the start of a tax year, preferably one starting AFTER it had been passed into law of course.

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Replying to stepurhan:
By Rebecca Cave
30th Aug 2016 17:47

The conditions were listed A to D when I put them there, somehow the formating system has screwed up the list.

I don't know why the legislation applies from 5 July 2016, other than that was the date it was introduced to Parliament. I suspect because it was framed as anti-avoidance it had to take effect immediately.

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Replying to Rebecca Cave:
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By Justin Bryant
31st Aug 2016 11:25

I agree this is a non-issue, unless someone can cite a tax case where the "sole or main object" test (in s756(3) ITA 2007) would have had a different outcome to a "one of the main purposes" test i.e. I think they both mean a 50% test in practice, but I am happy to be proved wrong with a relevant tax case showing the latter test can ever mean less than 50% (of the reason for doing something).

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By westland
31st Aug 2016 11:42

This looks like yet another piece of ill-considered legislation with (allegedly) unintended consequences. If it's not caught and revised now it will cause no end of trouble and expense and possibly freeze the buy to let market.

Westland

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By DJR1971
31st Aug 2016 11:54

Bit of a non-event as the others have mentioned.

Also, all the conditions except B relate to land and not property. Even B relies on the value of the land as opposed to the bricks & mortar. This looks to capture those that have land banked not the traditional BTL investor.

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Replying to DJR1971:
By Rebecca Cave
31st Aug 2016 15:14

"Land" in tax law always means land and the buildings thereon

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By Gary Stevens
31st Aug 2016 12:13

As usual small landlords are being blamed for absolutely everything.

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Replying to Gary Stevens:
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By ShayaG
31st Aug 2016 13:08

Gary Stevens wrote:

As usual small landlords are being blamed for absolutely everything.

I see a lot of the equation of morality with taxes on AccountingWeb. We need to break this equation. I don't believe small landlords are bad people, or are morally culpable for the current hyperinflated housing market. It's just that in the perfectly moral and legal exercise of their right they have entirely unintended negative consequences for society as a whole.

This is an eminently justifiable policy for a devastating problem. In my part of London, a 2/3 bed middle of terrace in need of work goes for £650k. It's not sustainable - nobody who would live in a terraced house can afford these prices - it's a house of cards which could come crashing down and hurt people - not least small landlords. If prices came down, capital would be freed up for banks to invest in companies, and for people to spend on their quality of life, which has been in decline since the great crash of 2008.

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Replying to ShayaG:
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By Gary Stevens
01st Sep 2016 11:22

I completely disagree - it is not justifiable. Most landlords are small players. They have been encouraged directly (by successive governments) and indirectly (rubbish (and getting worse in future) pensions, unreliable stock market, etc) to invest in property. We have many many small landlord clients. The typical profile is middle-class, middle earners and FRUGAL. They are absolutely brilliant savers and forgo luxuries to save. These are the people who put money away to allow them to invest it. They are not millionaires ploughing untold cash reserves into property. They are a group of hard-working people who deserve some return on their saving and investment efforts. Please tell me - in the face of low government pensions, unreliable private pensions, a stock market that a normal person just doesn't understand or trust - what do you recommend to your clients? Where should they put their money so that they can create wealth for themselves and future generations?

In my part of London (west London zone 2/3), there are many developers who wish to build new accommodation and plenty of land ripe for redevelopment- the planning policies make it completely impossible. There are developments where millions have been spent on consultants and planners - yet they are no closer to starting building due to nimbys.

There are an incredible amount of local activists who are against absolutely any development. The same activists complain over their dinner parties about the high house prices (especially when these same people's children find it hard to get on the property ladder) - I see and hear this hypocrisy on a daily basis.

I have many many examples of pathetic local activist groups who want absolutely no new development in these areas of London - despite there being an urgent unmet requirement. I have been to many local residents meetings and the amount of energy, time and money they spend on slowing down developments is astonishing. My local residents group lobbies so hard and has slowed down potentially 1000s of new units going up.

Small landlords are the entrepreneurs of the property market and they deserve some fairness. They are not ruthless multi-millionaire megalomaniacs. My experience is that they are people who want some financial freedom from wage slavery and try hard to get it. I admire these people. We shouldn't be punishing these people and making them poorer - in the same way other small business owners shouldn't be.

The government can do a lot more to loosen the planning policies to increase supply of property.

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joe
By Smokoe Joe
31st Aug 2016 12:24

Can I confirm where in A, B and D it says "The main purpose of one of the main purposes", it should read "The main purpose or one of the main purposes" ?

Makes a big difference as, the former is far more encompassing than the latter, if you could actually establish it!

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Replying to Smokoe Joe:
By Rebecca Cave
31st Aug 2016 15:15

Thanks for spotting that Smokoe Joe I have corrected the article.
The draft law can be found here http://www.parliament.uk/documents/commons-public-bill-office/2016-17/co...

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By mikebeadle
31st Aug 2016 12:31

Seems perfectly reasonable to me. If you buy land or property with a view to benefiting from its appreciation then this is a trading activity and should be taxed as such

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By PARININA
31st Aug 2016 12:49

Rebecca,

Very interesting article. Can you please throw some light as to what is "considerable time" for letting out the property? As respondents have mentioned 60 months, maybe we need some practical guidance on this and would be interesting to see how HMRC/Tribunals interpret the law.

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Replying to PARININA:
By Rebecca Cave
31st Aug 2016 15:19

HMRC currently use an unofficial and unpublished rule of thumb in main residence (PPR) cases of 4 years. If the property has been owned and occupied by the owner for at least 4 years, a claim for PPR is not normally challenged.
I agree gudiance is necessary.

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By Sam Litchfield
31st Aug 2016 13:07

Consider the situation of a colleague of mine - she owns a flat that, for some time, has been in negative equity. It was her PPR but, on having children, was too small. The negative equity situation resulted in her having to buy a second, larger property and rent out the flat. She handles the letting herself (to save on agent fees) so now has to vet any tenants to make sure they are legally allowed to reside in the country, she can't offset her mortgage interest against the rent and, if by some fluke, the property market improves enough for her to finally dispose of it, she's going to have to pay income tax, not CGT. "Not a big deal" for some but for someone stuck with this through circumstance, it just adds to the misery.

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Replying to Sam Litchfield:
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By ShayaG
31st Aug 2016 13:15

I don't mean to be flippant but your colleague *does* have two houses, is currently sitting on a trading loss which could be relieved sideways against, say, employment income, resulting in a tax rebate, and may even make a gain. Compare to the "misery" of young millenials who are typically paying £2,000 rent per month (in London) for a rather cheap flat in Zone 3/4, and have to work pretty hard just to keep their heads above the water - I would say the extra tax rate your colleague is being asked to contribute is eminently justifiable in the overall context of the UK economy.

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Replying to Sam Litchfield:
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By stuart carpenter
31st Aug 2016 13:30

If the flat was previously her PPR, it seems very unlikely that any of the conditions A to D would apply.

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By Julian Stafford
31st Aug 2016 13:39

I can't see why a) this is objectionable and b) why the effect can't be circumvented by proper documentation and structuring. Also the burden of proof is on HMRC to prove "main purpose" rather than on the taxpayer to disprove it. If the taxpayer states that they intended to keep not sell when they bought the property, the circumstances would have to be extremely unusual for a contrary intention to be established.

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By tom2another
31st Aug 2016 13:51

Well, I think it's retrospective legislation of the worst kind.
I've inherited my part of my mothers house, which I will be converting from a useless 2 bedrooms to a 4 bedroom that I can sell, and now I'll be expected to pay income tax on it instead of CGT.

Frankly I think the taxman is already taking too big a chunk out of peoples pockets, and the government should look to reducing its spend, rather than carrying on [***] us in more and more devious ways.

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Replying to tom2another:
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By Huw Williams
31st Aug 2016 17:32

Not sure if the legislation would apply to you necessarily. The "main reason" for acquisition has to be to make a profit on sale. The only reason you acquired this property was because someone died.
Of course what you then do with it will determine whether you are a property developer (income tax) or investor (CGT) on a later sale. But I dont think the rules here have changed.

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By nigelr
31st Aug 2016 13:51

Having read the TIIN in question and the relevant clauses in the Finance Bill it appears to me that this amendment only applies to Offshore Companies which are used to develop UK properties. This was mentioned in the 2016 Budget so I also do not see how this can be taxation by stealth. The purpose of the legislation is to level the playing field between UK and non-UK developers. I do not therefore understand why you seem to consider that this will affect UK Buy to Let landlords.

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Replying to nigelr:
By Rebecca Cave
31st Aug 2016 15:10

If you read the law at http://www.parliament.uk/documents/commons-public-bill-office/2016-17/co... you wil see that it makes no mention of limiting the tax charge to offshore companies, although the TIIN implies that. The law will apply to individuals or comapnies wherever they are based.

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Replying to Rebecca Cave:
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By nigelr
31st Aug 2016 18:28

If you look at the very start under sectio 5 subsection 2 it clearly refers to Non-UK Resident companies then again in subsection 2a also in 5b subsection 1 it also only refers to non-UK resident companies. If you would like to direct me at the specific clause which expands this legislation beyond Non-UK Resident companies then I will reconsider the matter otherwise I think it is quite clear that you have misread the legislation.

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By N Reynolds
31st Aug 2016 15:14

Hi Rebecca
If I am to be concerned about the HMRC taking the view that some or all of my intention in acquiring a buy to let property is making a gain from the appreciation of the property should I not be just as concerned that I won't get Principal Private Residence Relief on my home because s224(3) TCGA 1992 says I won't get PRR if one of the reasons I purchased my residence was realising a gain on disposal?

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By eek
31st Aug 2016 16:13
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By tonyaustin
31st Aug 2016 16:36

Private residence relief would not apply in such a case because of Section 224 (3) TCGA 1992, as has always been the case. A UK resident buying and selling under these circumstances would be treated as trading and so subject to income tax or caught by Section 752 ITA 2007. Non-resident companies trading in the UK from a PE in the UK are subject to corporation tax on trading income. If not trading from a PE, they are not subject to tax on capital gains and are only subject to UK income tax on UK source income and not on profits of a trade carried on from outside the UK. I suspect that may have something to do with this.

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By [email protected]
31st Aug 2016 16:48

I wonder what HMRC's view as to intention might be in the case of a landlord who has a property on an interest only mortgage?

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By Deb-WTS
31st Aug 2016 16:58

So, what about Business Property Relief for IHT where there is a similar grey area between trading and investment? HMRC is trying to have its cake and eat it!

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By [email protected]
31st Aug 2016 18:02

It has been suggested to me that the true purpose of this is unsettle people thinking of incorporating their property businesses: if the gain is Income Tax there is no possibility of the CGT incorporation rollover relief and the transferor gets stuffed on incorporation. Maybe HMRC/Treasury have read all the articles about incorporating to avoid the interest relief restriction and think it might work!
It might not apply to someone's circumstances but who is going to be brave enough to try it?

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By perrystock
31st Aug 2016 23:29

What happens if I bought a plot without planning consent about 10 years agoto be able to build a house (after getting planning Consent which I am very confident about) - for my daughter to live somewhere close to where she grew up in Surrey.

She now says she wants to move elsewhere in the UK and tghus I am thinking of selling it off with the benefit of planning Consent.

By the way - I am a chartered surveyor and work for clients on property management or development matters.

Will I get caught as a trader or just someone who will be simply (leniently?) treated with only CGT?

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By justsotax
01st Sep 2016 14:42

Not sure I can see any issues. Most property investors are looking for recurring income, and if they have done research it will reflect the very fact that they are looking for high yield/below market value properties. Any capital increase is a nice bonus in most cases.

It will however catch those guys who claim to have a rental property business but are in fact property developers.

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By MBK
02nd Sep 2016 08:17

@Justin Bryant

I'm interested in your argument that the reason for making a profit would have to be more than 50% of the reason for acquisition.

You want a tax case to prove it - but I'm not sure I agree. The legislation refers to "one of the main purposes". If your view is right there can only ever be one main purpose - for the obvious reason that once one reason is more than 50% of the total, then all other reasons must by definition be less than 50%.

So the fact that the legislation refers to multiple main reasons must, it seems to me, mean that a main reason for these purposes can be something less than 50%. But quite where the dividing line between a main reason and a "non main" reason lies is unclear.

In practice, it requires HMRC to get inside the mind of the investor at the time of the purchase. So I suspect that the use of this legislation will be reserved for the most extreme cases. It's a bit like the anti avoidance on transfers of income streams. On the face of it, that legislation could be used to recharacterise a lot of transactions that are subjected to CGT - but HMRC almost never tries to do it.

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By Rebecca Cave
05th Sep 2016 08:32

My attention has been drawn to a statement from an "HMRC offical" published on the NLA website:
http://www.landlords.org.uk/news-campaigns/news/nla-reassures-members-ov...
This implies that landlords who buy properties to let out will not generally be caught by the new legislation discussed about. However, the explanation from HMRC includes tests and proceedures which are not included in the legislation, so it appears that landlords are to be taxed by law and untaxed by HMRC guidance -yet again.

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By simonwwhitt
05th Sep 2016 12:48

My greatest concern is that this appears to alter the onus of proof. Many landlords start out making at best only a marginal trading profit - they rely on rental inflation in order to generate profits in future years. But HMRC may well try to interpret this situation that they entered the transaction in order to make a capital profit.
Does the following offer any comfort though? http://www.landlords.org.uk/news-campaigns/news/nla-reassures-members-ov...

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By Justin Bryant
05th Sep 2016 17:31

MBK, not quite, there can be 2 main purposes if they are exactly 50% each (unlikely) of the reason for doing something , but in practice it's a 50.1% test and my above view is indirectly (and probably unwittingly) confirmed by the Treasury in this link.

http://www.lawandtax-news.com/asp/Nothing_To_Fear_From_Land_Tax_Reforms_...

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By Justin Bryant
06th Sep 2016 13:35

I see from the link below that HMRC also agree with my view here:

http://www.step.org/news/hmrc-reassures-buy-let-landlords-last-minute-st...

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By Robert Hobbs
06th Sep 2016 14:49

The legislation looks remarkably similar to the existing anti avoidance legislation at s756 - s757 but extended to non UK tax payers. It would have been unusual for HMRC to apply the existing legislation to buy to let scenarios so why would anyone think otherwise now. Glad to see this has been clarified in committee to put an end to the unnecessary panic.

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By Merv
08th Sep 2016 12:28

A question :
If spouse A gives half of a property to spouse B , and then ,within a few months, the property is sold with a large gain, do these new provisions mean that the gain by spouse B is taxed as income, not capital gain ??
Merv

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By AndrewV12
21st Nov 2016 11:21

As a nation were 1.6 Trillion, some say 1.7 Trillion, Even the Government have the possibilities of raining revue through taxing gains on land and buildings as a rich area of expansion.

This may not be the last you have heard on this.

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By lattod
28th Feb 2017 14:18

All of these tax hits are just pushing rents up.

It's bizarre, the government has nothing in place for the increase in homelessness and yet it continues to punish people for investing for their long term income due to pensions being such a terrible option.

Rents are going up 50% in the next 5 years - I did a video / article about it here : http://daniellatto.co.uk/podcast-77-savills-predict-rents-to-rise-20-her...

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By norstar
31st Mar 2017 17:47

Well it seems this change has now affected a client. A chap has seen me today who inherited his property 30+ years ago, and rented it since (which he's now fed up of). He has now obtained planning permission for two properties on the land and is looking at developing then selling, or selling now to a developer with planning permission in place. Clause D appears to catch the transaction if he develops but what then happens to the base cost? Is this "converted" to a cost of sale line item? Seems counter intuitive to me. And is obtaining planning permission already "development" in itself?!

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