Capital gains on BTL to be taxed as income

Capital gains on BTL to be taxed as income

16:52 PM, 25th August 2016, About 5 years ago 124

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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

by Mark Alexander

9:04 AM, 26th August 2016, About 5 years ago

I would love to be pointed to the part of the Bill supporting that theory.

by Steven Burman

9:13 AM, 26th August 2016, About 5 years ago

Reply to the comment left by "James Fraser" at "25/08/2016 - 22:56":

James,

Don't be fooled by the 'assumption' that this has just been badly written. This government has an agenda and that agenda is to wipe out the PRS. This has not been 'badly written' or 'misinterpreted'...it has been intentionally written this way to cause confusion and ambiguity in order for the government to take maximum advantage. MP no longer stands for Member of Parliament....it stands for Malicious Parasite.

Since the initial publication of S24 I have been advising people to sell up and move to somewhere more welcoming (Malta appears to be popular...I am off to Spain) where hard work and endevour is rewarded....not stolen from you by inept parasites.

I stand by my advice.

by Simon Hall

9:18 AM, 26th August 2016, About 5 years ago

The way, I read this legislation is that, "If you buy a property when you do not have any intention to keep it for long term i.e. when you bought the property/land to develop/construct new dwelling with pure intention of making Capital Gains then it would be treated as "Trading Income" therefore you will be taxed on your marginal rate of tax as opposed to CGT rates of 18%/28%.

However, if you are a Buy to Let Investor and you have held properties for number of years on Buy To Let Basis then this legislation will not affect you. Mind you "Trading Income"...which includes flipping, development of land, renovation with intention to make CGT has been around for donkey years.

If I have misunderstood above, then please accept my sincere apologies.

by Mark Alexander

9:32 AM, 26th August 2016, About 5 years ago

Reply to the comment left by "Simon Hall" at "26/08/2016 - 09:18":

Hi Simon

I believe that that was what was intended, however, the cynical side of me takes more convincing, especially following The Law Society paper with regard to the wording actually used.

Is it a coincidence that it is so badly worded, so as to affect landlords, that The Law Society have stepped in to challenge the wording?

by S.E. Landlord

9:39 AM, 26th August 2016, About 5 years ago

I think it is aimed at developers but think it will also catch BTL if it is decided to develop the property and it adds significant value. It is badly written and I would hope the wording is amended prior to the finance bill becoming law.

by Whiteskifreak Surrey

9:40 AM, 26th August 2016, About 5 years ago

Sorry for perhaps an obvious question, but will that affect the properties sold by Limited companies?
At this speed of malicious legislation we might have to either sell now or incorporate. The latter being a big cost unless anyone can point out to relevant posts. please/
Thank you!

by John Stuart

9:41 AM, 26th August 2016, About 5 years ago

https://hansard.parliament.uk/commons/2016-07-07/debates/48fe1cae-cc46-4b39-bacc-d2362f07b817/FinanceBill(SixthSitting) Go to 4.15pm

The intention stated there seems clear which is that developers would be taxed on the profit on a transaction as income rather than a capital gain.

However, to contradict that, the bill is written in such a way that any property investor would pass the test - i.e. they bought a property in the expectation that it would rise in value.

Assuming it passes in to law unchanged, then the question is how HMRC apply it, hence the comments of the Law Society.

by Mark Alexander

9:54 AM, 26th August 2016, About 5 years ago

Reply to the comment left by "Whiteskifreak Surrey" at "26/08/2016 - 09:40":

Profits made by a limited company are charged at the rate of Corporation Tax (currently 20%) regardless of whether the profit generated from rental income or increase in property value at the point of disposal.

by Mark Alexander

10:03 AM, 26th August 2016, About 5 years ago

Reply to the comment left by "Whiteskifreak Surrey" at "26/08/2016 - 09:40":

The costs of incorporation are incredibly difficult to calculate which is why we had a team of professionals produce a spreadsheet to assist. Please see >>> https://www.property118.com/landlord-tax-calculator/85679/

We have also written a series of articles to explain the various legislation which can be used to significantly reduce or even negate the tax consequences of incorporation as well as the need to refinance when incorporating. You may have to lock yourself away and wrap a wet towel around your head when reading them, I did when I wrote them, but you will definitely find them useful. The first in the series can be found here https://www.property118.com/section-162-s162-refief-landlords/82564/

The others in the series are linked at the bottom of the article.

by Mark Alexander

10:08 AM, 26th August 2016, About 5 years ago

Reply to the comment left by "John Stuart" at "26/08/2016 - 09:41":

Hi John

Yours is the best explanation I have read so far in my opinion and I concur with your conclusion.

I think it would be dangerous just to wait, in hope, to see how HMRC would interpret the words in the legislation. I can't imagine they would take the soft line, can you?

We must fight this now.

I am very grateful to The Law Society for picking this up and pointing it out to The Treasury. However, given that I don't trust The Treasury these days I'd like to think landlords will help to fund us to fight this and other attacks on landlords through membership of Property118 Action Group.


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