On property gains from July 2016
Selling UK property for a gain is normally subject to Capital Gains Tax (CGT) of 18% or 28%. However, through changes to the 2016 Finance Bill, it is possible your gain could be liable, instead, to income tax of up to 45%. How does this sneaky new tax rule work? And is there a way around?
This article does not constitute advice.
Professional advice should be taken prior to acting on any part of it.
Why the new legislation?
There has not been any official announcement why this change has been put forward, however changes in the 2016 Finance Bill will mean that properties, both commercial and residential, that are sold for a gain after 5 July 2016, could be caught in this new tax rule, affecting potentially thousands of individuals and companies that have invested in UK property.
It is likely that this is part of the wider government agenda to reap extra tax from property investors in the UK and/or dampen interest in property investment as a whole.
Capital Gains Tax versus Income Tax
Ordinarily gains made on the sale of properties are taxed under CGT rules.
The current rates of CGT relating to commercial property gains are 10% for basic rate tax payers or 28% for higher-rate taxpayers. When it comes to gains on residential property the rates are 18% and 28% respectively, for basic and higher-rate.
However, if the same gains are subject to income tax, the rates change. Income tax is currently 20%, 40% or 45%, plus there is also a national insurance supplement of up to 9%.
Limited companies have an advantage of being able to claim indexation allowance on any gain made on assets held in the company, which can reduce the overall tax liability. This is not available to individuals though.
Companies also have the flat rate of corporation tax, currently 20%, which applies to all income and gains.
How may you get caught in this new tax rule?
If any of the following conditions can be demonstrated with regards to your gain following 5 July 2016, the property could be taxed under income tax for individuals, or corporation tax for companies, rather than the usual CGT.
Conditions
- The main purpose, or one of the main purposes, in acquiring the land was to realise a profit, or gain, from it’s disposal
- The main purpose, or one of the main purposes, in acquiring the property, which derives it’s value form the land, was to realise a profit, or gain, from the disposal of the land
- The land is held as trading stock
- The main purpose, or one of the main purposes of developing the land was to realise a profit, or gain, from disposing of the land when it is developed.
What this means
Property developers that invest in properties to develop and sell for a profit, like in clause 4, should already be taxed under income tax rather than CGT, so are likely to be unaffected.
However, taxpayers that invest in a property to hold for a while until the market conditions are more favourable, could get caught by clauses 1 or 2, should they make a gain.
Transferring to an associate before sale also won’t solve the issue, as the tax charge applies to all those involved with the transaction that could be profiting.
The only exemption visible at the moment is for Private Residence Relief (PRR) as this exempts CGT.
Property investment as a rental property
On the other hand, taxpayers that invest in a property to let and then sell at a later date for a gain, could also be caught under clauses 1 or 2 if they are unable to demonstrate that their intention was not to realise a gain.
This could be tricky to provide evidence, although if the property is let for a considerable time, this could be sufficient.
This bill is subject to sign off, which is due to happen in early September, around now. At present there appears no guidance on the new law from HMRC either, although it is clear that guidance will be needed to outline the specific details of how a taxpayer could be liable within conditions A or B.