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