Capital gains on BTL to be taxed as income

by Mark Alexander

16:52 PM, 25th August 2016
About 4 years ago

Capital gains on BTL to be taxed as income

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Capital gains on BTL to be taxed as income

Capital gains on BTL to be taxed as incomeIf you thought clause 24 of the 2015 finance bill was underhanded, wait until you get a load of this! Capital gains on BTL to be taxed as income

The government have slipped some additional clauses into the finance bill 2016 “Sections 75-78: taxation of profits from trading and investing in UK Land” which make profits made on the sale of buy-to-let property become taxable income, at income tax rates.

This wasn’t announced in the budget and there has been no consultation.

The Law Society has made representations to the government, prepared by its Corporation Tax sub-committee. These representations set out how the amendments will materially change some investors tax obligations.

Law Society chief executive Catherine Dixon said “By introducing a significant change in this way, the government is denying the public the chance to consider and comment on these proposals. If the government did not intend to make a material change, they need to clarify the language in the bill before it is passed. If they are intent on these changes, they should submit them for proper public consultation and legislative scrutiny”

A Law Society Pres Release says …

“Significant amendments to the Finance Bill slipped in at committee stage set a disturbing precedent of avoiding proper consultation and scrutiny.

The changes, which alter the way buy-to-let properties will be taxed, may result in many investors paying income tax rather than a capital gains tax on their investment, creating uncertainty for taxpayers.

The way these changes were introduced, in particular without consultation on the draft legislation before it was added to the bill at such a late stage, starts to feel like legislation by stealth.

No matter what the policy proposals, proper consultation and process is vital to maintain public confidence in our democratic institutions.”

They key sections of the report are:

2.4 For example, proposed section 356OB(4) CTA 2010 would apply the new rules where “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” (Condition A). The consequence would be that the profit on realisation would be taxed as income rather than as capital gain. We consider that there are many situations where this formulation of the test would capture transactions that are uncontroversial investment transactions. Similar concerns arise in relation to Conditions B and D. (Proposed section 517B ITA 2007 has the same effect for income tax.)

2.5 In particular, we consider that this formulation of the test could apply to many buy-to-let investors, despite the fact that they are clearly engaged in a property investment business on general principles. Any buy-to-let investor will assess the overall yield before making an investment decision. In areas of the country with low rental yields, an essential part of the investment proposition is the prospect for capital growth, even if the investor‟s intention is to hold the property for the medium to long term. Indeed in the current market, and given the low returns on other asset classes, there are few areas where the prospect of capital growth is an immaterial consideration for investors. Financially speaking, it is hard to say that the obtaining of that capital growth would not be one of the main purposes of acquiring the land. However, the average buy-to-let investor will have assumed that it will be taxed at capital gains tax rates on ultimate disposal of the property. If the government‟s intention were to change this, then the Society‟s view is that this should have been subject to proper consultation on the principle policy and the draft legislation. If the government‟s intention is not to change this, then the Society considers that the terms of the legislation should be amended to reflect that.

Sections 75 and 76 of the finance bill deal with Corporation Tax but 77 and 78 deal with Individuals/Income Tax.

A link to the specific bit in the draft legislation is here -> http://www.publications.parliament.uk/pa/bills/cbill/2016-2017/0047/cbill_2016-20170047_en_17.htm#pt3-pb5-l1g77

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Comments

David Price

12:25 PM, 1st September 2016
About 4 years ago

Reply to the comment left by "Dr Rosalind Beck ." at "01/09/2016 - 10:08":

Ros since when did government need evidence to make a decision? Look at "only one in five will be affected" and "Universal credit will make tenants more responsible".

Commercial Trust

16:22 PM, 1st September 2016
About 4 years ago

Reply to the comment left by "Whiteskifreak Surrey" at "31/08/2016 - 16:40":

"How it is possible the law or regulations apply retrospectively? Am I missing something?"

There are precedents in taxation for ex post facto law: http://news.bbc.co.uk/1/hi/business/8496921.stm

Given that the intent of the legislation is to prevent offshore tax avoidance, it isn't completely surprising that it would take effect before the date of assent.

Commercial Trust

11:40 AM, 2nd September 2016
About 4 years ago

We've published a more in-depth analysis on our website, which you can read here: https://www.commercialtrust.co.uk/news/property-investment/new-tax-on-btl-property-sales/

We discuss the background to the legislation, from its inception in Budget 2016 to the report stage of the Finance Bill; the haste of its introduction; the intention behind the legislation and the issues with the wording; existing guidance on REITs that provide some insight into HMRC's processes; and the current guidance on equivocacy and 'intention at acquisition'.

Dr Rosalind Beck

12:29 PM, 2nd September 2016
About 4 years ago

Reply to the comment left by "Commercial Trust" at "02/09/2016 - 11:40":

Thanks for that. It is a nice summary.

H B

10:57 AM, 3rd September 2016
About 4 years ago

Reply to the comment left by "Luke P" at "01/09/2016 - 09:18":

"How is it proposed ‘intention’ is decided?"

There has long been a tension between income tax and CGT. There is plenty of case law on this matter.

Clearly if you flip properties and hold them for less than a year, it is likely to be deemed income tax. If you significantly refurbished a property before selling, then it is likely to be considered income.

If you have a history of such activity, HMRC are likely to regard it as income.

By contrast, if you had a 5 year mortgage with an early repayment penalty but you sold anyway, you could point to it and show that your intention was to hold for more than 5 years.

Rod

17:21 PM, 3rd September 2016
About 4 years ago

Enough is enough! Over the years L/Ls have been hamered more and more from government, local councils, tenants, media. Here in the north I rent out at £85pw for a unit but after the usual expenses, tax etc I'm left with around £50. So', it takes a week to earn just £50 which is the going rate for a self employed for just 1 hours work! I'm sure the authorities don't see this side so if we ALL write to the appropriate gov' offices maybe it'll sink in! £50 is not worth the stress! This is provided the rent is paid! Time for a career change as there are plenty of vacancies in the 'benefit system!

Barry White

18:09 PM, 3rd September 2016
About 4 years ago

Reply to the comment left by "Jack Ass" at "03/09/2016 - 17:21":

Are you saying that the only way your rental property economically makes sense is if there is the prospect of capital gains? I'm not sure I would Mention it on a public forum given the wording of point 2.5 in the main article above

Lisa S

19:42 PM, 3rd September 2016
About 4 years ago

Reply to the comment left by "Jack Ass" at "03/09/2016 - 17:21":

Below the living minimum wage !

Dr Rosalind Beck

21:51 PM, 3rd September 2016
About 4 years ago

Mark Atherton has written a piece in the Times today entitled: 'Buy to let landlords can breathe easy.' I only skimmed it, but it seems that the Treasury has cleared up this matter to the satisfaction of the Law Society and it is not going to affect buy to let landlords (personally I wouldn't completely breathe easy as if the law is written in an ambiguous way it could be that at a later date someone decides it should be interpreted differently).

Donald Tramp

9:54 AM, 4th September 2016
About 4 years ago

Reply to the comment left by "Dr Rosalind Beck ." at "03/09/2016 - 21:51":

I read the article yesterday as well and a treasury spokeswoman 'clarified' the wording saying that btl sales will continue to be taxed using capital gains calculations rather than through income tax and that the tax was aimed at developers.

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