Further tax rises for landlords?
The Finance Bill 2016 is still going through the process of becoming law but potentially ominous changes were introduced at the committee stage in July which could increase the tax that UK property investors pay on the profits they make on selling properties.
The legislation in question was initially drafted to attack offshore structures being used by property developers to avoid UK tax however the current draft rules could reach much further than this.
If the Finance Bill 2016 is passed as it stands, profits from UK property sales made on or after 5 July 2016 could be taxed as trading income if the main purpose, or one of the main purposes, in acquiring the land was to realise a profit or gain from its disposal.
For example, a property investor who buys properties with low rental yields, holds them while the market improves, then sells for a profit could be caught. Similarly, even if the property was acquired with good rental yields, if part of the motivation was an expectation of capital growth, this legislation could potentially bite.
Higher rate tax paying individuals currently pay tax on capital gains at 20% on gains from commercial property and 28% on gains from residential properties. If the same profits were subject to income tax, the rate would be 40% or 45% plus national insurance at 2%.
Companies pay corporation tax at 20% on both income and gains but can deduct indexation allowance when calculating the amount of taxable gain, so may also pay more if profits are treated as trading rather than capital.
As the legislation is not yet in force, and it is unclear whether this was an intended effect of the legislation, these clauses may be subject to change. Various property lobbying groups and professional bodies such as the Law Society have made representations to the Government and the Bill is next to be debated on 5 and 6 September.
Whilst the legislation is still draft, if enacted it would apply to disposals made after 5 July 2016. If you have any concerns or would like to discuss any aspect, please do give either your usual BHP contact or myself a call.