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The new tax on profits from trading in or developing UK land - impact on buy-to-lets

20 September 2016

The new tax on profits from trading in or developing UK land - impact on buy-to-lets. The new rules apply from 5 July 2016, but some commentators have suggested that their impact on buy-to-let investors is unclear. 

Those who have expressed concern have put forward the view that buy-to-let investors could be caught, resulting in gains on disposal being subject to income tax at up to 45% instead of capital gains tax at up to 28%. This concern stems from the wording of the legislation, which applies 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”.

It has been suggested in this context that any capital growth on a buy-to-let could be construed as a main purpose of acquiring the property.

However, the Chief Secretary to the Treasury, David Gauke, has stated that the measure “is targeted at those who have a property building trade” and that “it does not impact the tax profile for investors in UK property”. 

HMRC has also stated to the National Landlords Association that: “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”. Gains would only exceptionally be charged to income tax, as under existing legislation, where the investor:

  • decides to undertake development prior to sale, in which case the profit on the developed part, from the date the decision to develop for sale, would be trading income; or
  • sells the land in a contract with a 'slice of the action' clause allowing them to benefit from future development of the property, in which case the 'slice of the action' profit would be taxed under the new legislation.

This will provide some reassurance to investors, pending the publication of further guidance by HMRC. In the meantime, some comfort can be taken from the draft guidance published for consultation which seems to make clear that the new legislation applies only to trading situations and not to property held as buy to let investments, although it should be noted that as this is draft guidance it is subject to change. Of course, HMRC statements and guidance are never as satisfactory as clearly worded legislation, and investors and advisers will be well advised to keep an eye on how HMRC enforces the new legislation in practice, and how the practice in this area develops.