A new law, designed to tax foreign investors who snap up UK properties at bargain prices, may also snare UK-based landlords from 5 July 2016.
When you let out a property, you pay income tax (at 20%, 40% or 45%) on the net rental income, or corporation tax (at 20%) if you operate as a company. When you sell the property, you pay capital gains tax on any capital gain at 20% or 28%. A company will pay tax at 20% on the gain but it can deduct an allowance for inflation, so the taxable amounts are not directly comparable.
Property developers or dealers (as opposed to landlords) pay income tax or corporation tax on all the profits they make from selling or letting their properties. The new law treats a landlord as a property developer if HMRC can show that one of the main drivers for buying the property was to make a gain on its sale. This means the tax payable will be income or corporation tax, not the lower capital gains rates.
In practice, HMRC may assert that the profit motive was there on acquisition and the landlord will have to disprove it If the property has been held for a relatively short period in a rising market, that may be a difficult assertion to challenge.
As yet there is no official guidance on the circumstances in which HMRC may seek to apply this new law. For now, be cautious of buying properties to make a quick gain, as the tax payable may be higher than you expect. Please discuss your plans to develop or sell property with us before the event, so we can help you budget for the tax due.