Over the last couple of weeks there has been much discussion over the possibility that Buy-To-Let landlords may find themselves subject to income tax at rates up to 45 per cent on any gain they make when disposing of a property, instead of capital gains tax at 18 per cent or 28 per cent. HMRC has provided reassurances but the legislation needs to be far clearer.
Over the last couple of weeks there has been much discussion over the possibility that Buy-To-Let landlords may find themselves subject to income tax at rates up to 45 per cent on any gain they make when disposing of the property. A Buy-To-Let landlord would normally expect to pay capital gains tax at 18 per cent or 28 per cent on such a disposal.
The background to this is the modernisation of the artificial transactions in land regime which was announced in the Budget 2016. A technical note was issued by HM Revenue & Customs on 16 March 2016 but the actual legislation was only issued at Committee stage on 5 July.
While parts of the legislation apply specifically to non UK residents, clauses 76 (corporation tax) and 78 (income tax) transactions in UK land also apply to UK residents and to “a disposal of any land in the UK”, where just one of four conditions is met. The first of those conditions is that “the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land”. Most investors would agree that one of their main purposes in buying any asset is to make a profit on sale. This wording is far wider than the “sole or main object” test used in the existing transactions in land rules.
Indeed such wording could potentially bring an individual’s own home into the income tax net on sale if one of his purposes is to make a gain on sale in order to be able to “trade up” to a larger house in due course. Principal Private Residence relief could be denied if the gain is chargeable to income tax.
HMRC has responded to representations from The Law Society and the National Landlords’ Association to say that “generally property investors that buy properties to let out and some years later sell their properties will be subject to capital gains on disposal rather than being charged to income on disposal”. This statement itself raises uncertainties: the word “generally” is apparently there to enable income tax to apply where properties are developed before sale or where the vendor retains the right to share in profits from future development of the property. But how many years is “some years later” to ensure capital gains tax treatment?
Reassurances from HMRC are welcome but the legislation needs to be far clearer and more specific if there really is no intention to catch the Buy-To-Let landlord or other situations where making a profit is one of the main objects. We urge MPs to address this during the Report stage this week, to ensure that the legislation is made clear and fit for purpose.