By Simon Vincent, Senior Accountant at Hive Business.
HMRC have introduced draft legislation into Finance Bill 2016 which could see gains on your property disposals taxed as income, rather than capital gains (CGT). This means no annual CGT allowances and, for companies, no indexation allowance. More importantly, however, this could see individuals taxed as much as 45% on these profits rather than the CGT rates of 18% or 28%.
The fact that this legislation has been introduced at committee stage with no warning or public announcement (and certainly not included in the March budget) is somewhat underhanded, especially as this will apply to any disposal after 5 July 2016.
It would seem that the intention is to prevent offshore individuals profiting from dealing in or developing UK land but as usual, the legislation is so widely drafted that it could catch almost any property owner in the UK.
It is proposed to treat as income profits arising from property disposals where obtaining profit on disposal was one of the main reasons for the original purchase (whether or not any development took place).
As drafted, the legislation would actually seem to rely on a very grey point: whether or not an appreciation in capital value is one of the main purposes of buying property (incidental to receipt of monthly income). Arguably, if you let the property for a substantial period then there could be a case to not apply this legislation, but as yet there are no specific provisions for this.
It would be interesting to first see what guidance HMRC eventually release on this (as yet, none is available), but their guidance is not always to be taken as gospel. Indeed I suspect it may be the courts that ultimately end up making such a decision.
Clearly this may have far-reaching economic consequences as, despite recent attack, our love for property does not yet seem to have diminished. It is difficult not to foresee that this will fundamentally change the behaviour of a proportion of the population that own property; after all, if you sell a property under this regime you may only retain 55% of the profit. Logically many may instead seek access to funds via drawing down against a mortgage; choosing to ultimately pass the (mortgaged) property to the next generation.
If you have concerns on this topic, wish to side-step the above tax rates in the future or simply wish to explore solutions using our property tax planning experts, then please call us on 01872 300232 or email hello@hivebusiness.co.uk.
Update (September 2016): HMRC have since been in touch with some of the major landlord’s associations issuing assurances that this new legislation is not aimed at buy-to-let property owners. No detail has been released, however, so we will reserve judgement until we see some ‘better’ legislation. For now though, this seems like good news.
