Changes to Finance Bill will not impact tax profile of property investors

HMRC has dismissed claims that new wording in the amended Finance Bill will make buy to let investors liable to pay income tax, as opposed to capital gains tax (CGT) when selling their assets.

Last week the Law Society warned that the newly worded Finance Bill, as amended in July, suggests that buy to let investors could be liable to pay income tax rather than CGT when selling their properties. In real terms, this would equate to having to pay up to 17% more in tax, the society said.

Generally speaking, the rate of CGT is lower than the rate of income tax.

At present, basic-rate income tax payers pay 18% in CGT on residential property and higher-rate taxpayers are charged 28% CGT.

However, income tax which private buy to let landlords pay on their rental profits, is currently set at 40% for those with an income of more than £43,000 a year, rising to 45% for the highest rate payers.

The society was also critical of the way in which the wording was added, as it happened at the report stage of the bill, as well as the way in which the wording closely follows existing transactions in land rules: rules designed to prevent tax avoidance.

At the time, chief executive of The Law Society, Catherine Dixon said:

“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.

“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.”

However further to discussions between HMRC and the National Landlords Association, the Revenue clarified its position with the following statement:

“HMRC considers that generally property investors that buy properties to let out to generate property income and some years later sell the properties will be subject to capital gains on their disposals rather than being charged to income on the disposal.

“The exception, that is the reason why it says generally above, is that:

“If the investor decides to undertake development prior to sale the profit on the developed part, from the date the decision to develop for sale, will be trading income. But that would be trading income without the new legislation;

“Or if the investor sells the land in a contract with a ‘slice of the action’ clause (allowing them to benefit from changes in the future development of the property) the slice of the action profit will be taxed under the new legislation - but it was previously taxed under the transactions in land legislation.”

Confirming this, the Chief Secretary to the Treasury’s explanation of the new clauses stated:

“This measure is targeted at those who have a property building trade; it does not impact the tax profile for investors in UK property.”

HMRC is expected to release further guidance on the issue in the near future.


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