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%.
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.
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.
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.