New property tax changes hits property investors
New stealth property tax changes came into force recently. From 5 July 2016 profits from selling UK property can be subject to income tax at up to 45%, rather than CGT (capital gains tax) at 18% or 28%. This change could affect Buy to Let investor landlords and people renting out their property.
The increased stealth property tax is a result of a significant change was made to Finance Bill 2016 during the committee stage held in July. This could increase the tax payable by thousands of individuals and companies who have invested in UK properties.
Normally this type of investor would expect the profits made from selling properties be taxed as capital gains and be subject to capital gains tax (CGT). Now where the new law applies the profits will be subject to income tax or corporation tax. This will likely means higher rates of tax will be payable.
Individuals pay CGT at 10% or 20% (basic or higher rate taxpayers) on gains from commercial property, and CGT at 18% or 28% on gains from residential properties. If the same profits are subject to income tax, the tax is payable at 20%, 40% or 45% plus national insurance at 9% or 2%.
Companies pay corporation tax at 20% on all income and gains. But companies (not individuals) can deduct the indexation allowance when calculating the amount of taxable gain, which may significantly reduce the amount which is subject to tax.
When will the new property tax be payable?
If the Finance Bill 2016 passes (and this is likely), profits from UK property sales made on or after 5 July 2016 will be taxed as trading income (subject to income tax or corporation tax) if any of the following conditions apply:
- The main purpose or one of the main purposes in acquiring the land was to realise a profit or gain from its disposal
- The main purpose or one of the main purposes in acquiring the property which derives its value from 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 of 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
If you already a professional property investor who buys properties, develops them and sells them on then you will be unaffected by the new Finance Bill. They should already be treating profits from selling properties as income rather than capital gains.
landlords who buy properties to let out and then sell those properties for a profit some time later could also be caught
Taxpayers who buy properties, hold them while the market improves, then off-load for a profit will be caught by conditions A or B. However, landlords who buy properties to let out and then sell those properties for a profit some time later could also be caught by conditions A or B. If the property has been let out for some time then there might be an argument that the main purpose was not to make a gain from its sale so might escape being taxed as income.
You should always seek advice from a qualified professional on all matters relating to tax.
Get in touch with us to discuss buy to let investments at the Foster Lewis and Co estate agents office on 02476 592929 or use our contact form.