Taxed by law and untaxed by guidance

Casting net
istock_canaran
Share this content

Five months after introducing wide-ranging tax rules that impact property investors, HMRC has released guidance which effectively exempts many landlords from those rules.

Tax rises

In August I revealed how property investors could be hit by a sneaky tax rise, imposed by new anti-avoidance provisions relating to transactions in UK land, (FA 2016, ss 76-82).

These new rules apply to UK property disposals made on or after 5 July 2016, and treat the profits arising from the disposal as income rather than as gains. There are transitional provisions that apply to certain disposals made from 16 March 2016, which are designed to catch any transactions which were accelerated before the law was published on 5 July. These new transactions in UK land rules replace the existing “transactions in land” rules in CTA 2010, Pt 18 and ITA 2007, Pt 13.

Individual property investors caught by the new provisions are required to self-assess their profits as income, taxed at 40% or 45% plus NIC, instead of as gains subject to CGT at 18% or 28% for residential property; 10% or 20% for commercial property.    

Targets

The government’s stated targets for the revised transactions in land rules are non-resident companies and individuals, who would escape paying UK tax on profits made from UK properties, as their business base is outside the UK. However, the revised transactions in UK land rules can apply to any person who makes money from disposing of UK land or property, whether that person is tax-resident in the UK or not. Gains which qualify for the main residence exemption for the taxpayer’s home, are specifically excluded.

Guidance

On 13 December 2016 HMRC finally released guidance (to be included in HMRC’s Business Income Manual) to clarify the scope of the new transactions in UK land rules.

This guidance states that the new rules do not apply to businesses which acquire and repair properties in order to generate rental income, even if those businesses also enjoy capital appreciation from those properties. So the average buy-to-let landlord should not be subject to income tax on the gains he makes when he sells properties which were acquired for letting.

The HMRC guidance also makes clear that the new transactions in UK land rules are directed at businesses which conduct a trade consisting of property development or property dealing. The guidance lists the factors which would indicate the activities amount to a trade as opposed to an investment business. This point was entirely missing from the law presented in FA 2016, ss 72-82.

Uncertainty

The new guidance is extensive at 64 pages, but it tacitly admits that not every situation   will be covered, and that taxpayers should engage with their HMRC customer relationship manager (CRM) to discuss whether their transactions are caught. Taxpayers who do not have a CRM can use HMRC’s non-statutory clearance service to clarify if the new transactions in UK land rules apply to their business.    

Untaxed

This is not the first time that anti-avoidance legislation has been introduced, which throws a wide net over large population of taxpayers, but subsequent HMRC guidance “clarifies” the scope to narrow the effect to the intended targets.

Tax advisers should be aware that HMRC guidance has no legal standing (unless this is made clear in a VAT notice for example). A tax tribunal or higher court is not required to pay attention to HMRC guidance when deciding how the law should be interpreted. What’s more HMRC may change its guidance at any point, without notice. 

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

Please login or register to join the discussion.

06th Jan 2017 11:39

So: Individual (P), an additional rate taxpayer, incorporates company (C) which purchases a block of flats in need of some love. C injects money into refurbishing the flats in order to increase the value for eventual re-sale. C is clearly caught.

Because the property market is somewhat depressed at the moment, C determines that they will make a much better profit on sale by letting the flats for a few years and selling once property prices have increased significantly, and proceeds on that basis.

After a period of 5 - 6 years the value of the flats has risen significantly, and C sells to an unrelated 3rd party.

Following the sale, P liquidates C and the cash is distributed as part of the liquidation.

Under existing rules, C would be treated as a non-trading company, and CGT would be payable at the higher rate on the distribution. However, this legislation would define the company's activities as trade, enabling a claim for ER on the distribution. Because C has paid "income tax" (actually CT on trading income), P is not caught by the legislation.

Tax is paid by P at 10%. So the effective rate of tax on the disposal is 28%, and not 45% as it would be if P was caught.

I see nothing in the guidance notes that covers this.

Thanks (0)
avatar
to SteLacca
09th Jan 2017 21:41

I am mistaken in thinking property trading companies cannot claim ER regardless?

Thanks (0)
to Lordeano
10th Jan 2017 10:05

Agreed. However, HMRC would be treating the business as trading in property, and not property rental for the purpose of this legislation.

Thanks (0)
avatar
09th Jan 2017 12:03

This is dilemma that HMRC face when attempting to tax persons outside the UK - unless the same rules also apply inside the UK they are characterised as discriminatory under tax conventions - there is, of course, a danger that the rewritten rules may catch more people than originally intended, but it is difficult to see how HMRC can approach this any differently. The degree to which it changes the practical application of these rules to persons inside the UK was always going to depend on the practical application of these rules. As I see it they update the old transactions in land rules which were almost impossible to apply and cover most situations where the old rules should have applied.

Thanks (0)
avatar
09th Jan 2017 12:18

Extract above
'The government’s stated targets for the revised transactions in land rules are non-resident companies and individuals, who would escape paying UK tax on profits made from UK properties, as their business base is outside the UK. '

Why not other Countries will be looking at it. Also some non residents will be receiving rental income via housing benefit, its their golden opportunity to put back in the pot.

Thanks (1)