Capital gains on BTL to be taxed as income

by Mark Alexander

16:52 PM, 25th August 2016
About 3 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

Mark Alexander

10:04 AM, 4th September 2016
About 3 years ago

Can anybody point me to an article or Pres Statement written by The Law Society confirming they are happy with the new wording now please?

When The Law Society confirm in writing they are happy with the new wording and that the legislation does not affect BTL landlords then I will be happy.

michael fickling

10:38 AM, 4th September 2016
About 3 years ago

Certainly poor drafting in terms of the words used but i think the clue from the beginning has been the absence of the word" house" or "dwelling"..or "dwelling house"....as most sales involving land ( by some considerable majority ) involve a dwelling house... therefore one would have expected a sensible drafting to have included some form of those words IF it was intended to net us residential dwelling house landlords and it doesnt...Words actually used are" buildings" and "land."....taking that with the assurances being given I dont believe it was aimed at conventional dwelling house landlords.....but hey given the prejudice thats out there I suppose nothing is completely certain. I think the glass is three-quarters full for us on this one.

Gromit

11:23 AM, 4th September 2016
About 3 years ago

Sounds like a deliberate "loop-hole" that that Treasury could easily "plug" at some future date when the coffers are bare.

Mark Alexander

11:59 AM, 4th September 2016
About 3 years ago

Reply to the comment left by "michael fickling" at "04/09/2016 - 10:38":

That makes no sense Michael. If it did the HMLR would have to become the HML&HR.

Land is generic term used in law for property.

Rod

12:31 PM, 4th September 2016
About 3 years ago

To be blunt, the government are after money! As far as I see, the only glimmer of hope is the fact that many in parliament own property too and so wouldn't want to shoot themselves in the foot !!!

Dr Rosalind Beck

12:56 PM, 4th September 2016
About 3 years ago

Reply to the comment left by "Barry Fitzpatrick" at "04/09/2016 - 11:23":

Yes, Barry. That's what I think. They can do all the reassuring they like, but judges could interpret things differently if this matter were ever debated in court. If the Treasury wants to reassure people they should make the wording unequivocal.

Gromit

13:19 PM, 4th September 2016
About 3 years ago

Reply to the comment left by "Jack Ass" at "04/09/2016 - 12:31":

Didn't stop them from passing Section 24 into Law.

Dr Rosalind Beck

13:12 PM, 6th September 2016
About 3 years ago

Reply to the comment left by "Whiteskifreak Surrey" at "06/09/2016 - 11:32":

It looks like a good article. It's a shame they won't let us read it all.

dom glynn

10:04 AM, 8th September 2016
About 3 years ago

Reply to the comment left by "Dr Rosalind Beck ." at "06/09/2016 - 13:12":

Here you go Ros
Twenty years since buy to let took off, landlords are now a crucial part of Britain’s housing ecosystem. The private rented sector, accounting for around one in five properties, provides much-needed homes for those people who are not ready to buy or do not want to purchase a property.

However, the sector sometimes comes in for stick, with private landlords accused of snaffling new properties from under the noses of first-time buyers, driving up house prices, charging rents that are too high, and generally being a bad lot. But the real puppeteer here is market forces.

The buy-to-let boom has been fuelled by several factors according to Martin Totty, CEO of Barbon which insures both landlords and tenants: a mismatch between housing supply and demand particularly in London and the south east; rising property values making purchasing less affordable; and social changes, such as people moving more frequently for jobs.

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In 20 years’ time, buy to let could account for an even greater proportion of the total property market, Totty predicts. Indeed, it is weathering Brexit well, with rental yields sustainable and growing according to industry benchmark HomeLet, albeit at a more moderate pace than last year.

Despite the recent stamp duty hike, lenders are expected to finance more investments in residential property than in 2015. The potential fly in the ointment is further tax tweaks.

Next April, the amount of mortgage interest relief that landlords can reclaim will be limited to the basic rate of tax. But we must monitor the impact of such tax changes carefully because, no matter what you think of them, the UK needs more landlords if the population grows as predicted. Crucially, we need more houses.

Read more: Buy to let tax changes knock London luxury rent prices

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