HMRC Reassures Buy-to-Let Landlords

An unannounced amendment to the Finance Bill, under which gains from certain property disposals will be charged to income or corporation tax rather than capital gains, should not adversely affect buy-to-let investors, according to the National Landlords Association.

The government added the text at the bill’s committee stage in July without any consultation, ostensibly as part of a wider series of measures designed to make offshore property developers pay capital gains tax on their UK portfolios. However, the text of concern, in clauses 75-78, directly affects the taxation of UK buy-to-let properties. It implies that investors in UK property will be subject to income tax rather than capital gains tax on their disposal gains, if ‘one of the main purposes in acquiring the land’ was to make a profit or if they held the land as trading stock. This would significantly increase the tax payable on the disposal. Moreover, the amendment is retrospective to 5 July this year, the day it was first tabled, in order to stop the new tax being circumvented before the Finance Bill came into effect.

This drew sharp criticism from the Law Society, whose chief executive Catherine Dixon described the amendments as ‘legislation by stealth’.

At the time, the National Landlords Association, whose members are most at risk of paying the new tax, was concerned about the ‘poor wording’ of the amendment. However, the NLA now says it does not believe that landlords will be affected. It points out that the Treasury minister responsible for the amendment, David Gauke, said in committee that its function was to ensure that ‘profits generated by an individual from dealing in or developing land will always be chargeable to UK income tax.’

‘This measure is targeted at those who have a property building trade’, Gauke told MPs. It does not impact the tax profile for investors in UK property.’
The NLA did, however, take the precaution of seeking clarification from HM Revenue & Customs before the amendment actually becomes law. This has now arrived in a letter from Mark Carnduff of HMRC’s capital taxes division.
‘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’, says Carnduff.

However, there are exceptional cases in which the gains will be charged to income tax, he added. These are:

where the investor decides to undertake development prior to sale. In this case the profit on the developed part, from the date the decision to develop for sale, will be trading income.

where the investor sells the land in a contract with a ‘slice of the action’ clause allowing them to benefit from future development of the property. In this case the ‘slice of the action’ profit will be taxed under the new legislation.

In both cases, says Carnduff, these profits would already have been taxed as income under the existing legislation.

HMRC will shortly be issuing draft guidance to stakeholders and it will be necessary to run through this with a fine tooth comb after it is issued. In the meantime, the NLA says it will ‘continue to monitor the situation closely and ensure the government’s intention is made clear at both Report Stage and in the guidance.’