Over the summer there has been much discussion over the possibility that buy-to-let landlords may find themselves subject to income tax at rates up to 45 per cent on gains they make when disposing of property. A buy-to-let landlord would normally expect to pay capital gains tax at 18 per cent or 28 per cent on such a disposal.
The background to this is the modernisation of the artificial transactions in land regime which was announced in Budget 2016. A technical note was issued by HMRC on 16 March 2016, but the actual legislation was only issued at the Finance Bill committee stage on 5 July 2016.
While parts of the legislation, now in Finance Act 2016, apply specifically to non UK residents, sections 77 (corporation tax) and 79 (income tax) - transactions in UK land - also apply to UK residents and to ‘a disposal of any land in the UK’, where just one of four conditions is met. The first of those conditions is that ‘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’. Most investors would agree that one of their main purposes in buying any asset is to make a profit on sale. This wording is far wider than the ‘sole or main object’ test used in the previous transactions in land rules. Indeed such wording could potentially bring an individual’s own home into the income tax net on sale if one of his purposes is to make a gain on sale in order to still be able to trade up to a larger house in due course. Private residence relief would be denied if the gain is chargeable to income tax.
HMRC draft guidance states that ‘these rules do not alter the treatment of, or recharacterise investment activities, except where they are part of… a wider trading activity. In particular they do not apply to transactions such as buying a property (for the principal purpose of earning rental income OR as an investment to generate rental income and enjoy capital appreciation). The legislation should always be understood in the context that it is taxing only what are, in substance, trading profits’.
However, the draft guidance continues: ‘if any of the conditions are met and a person realises a profit or gain from a disposal of UK land, the profits should be treated as profits of a trade of dealing in or developing UK land’.
There is clearly some uncertainty as a genuine investment business which acquires a property with a main purpose of realising a gain in, say eight years' time, may be caught by the wording of Finance Act 2016. Given property investments are held for the longer term, it may be some time before there is a disposal, which could be viewed by HMRC in a different light.
Reassurances from HMRC are welcome but the legislation itself needs to be far clearer and more specific if there really is no intention to catch the buy-to-let landlord or other situations where making a profit is one of the main objects. Sadly, no changes were made to the legislation at the report stage in September with the Finance Bill receiving royal assent on 15 September 2016 with no amendment to the wording of the conditions. This suggests that the wording has been deliberately left ambiguous and offers the possibility for tax inspectors in future to use the legislation, in certain circumstances, to seek to charge income tax rather than capital gains tax on profits made on property disposals where one of the purposes was to realise a gain on sale.