Most individual buy-to-let UK residential property owners will probably assume that the straightforward purchase and subsequent sale of buy-to-let residential property is a capital transaction, such that individual investors will be liable to capital gains tax on gains made upon the disposal of such investments.
Transactions in UK land
However, anti-avoidance legislation concerning ‘transactions in UK land’ (introduced in FA 2016) broadly provides for a specific income tax charge from dealing in or developing land and other immovable property in the UK (ITA 2007, Pt 9A) where certain alternative conditions (A, B, C or D in the legislation) are met. For example, Condition A is broadly that a main purpose of acquiring the land was to realise a profit or gain from disposing of the land.
If a profit or gain is ‘caught’ by these provisions, it is treated for income tax purposes as the profits of a trade carried on by the chargeable person, arising in the tax year in which the profit or gain is realised. This applies to gains of a capital nature, in the same way as in relation to other gains.
Is there a problem?
The Finance Bill 2016 legislation on transactions in UK land was published after the original Finance Bill clauses, and without consultation. Shortly after the Finance Bill 2016 clauses on transactions in land were published, the Law Society of England and Wales published a representation regarding the draft legislation.
It pointed out that the provisions as drafted could apply to many buy-to-let investors, and expressed the view that if this was not the government’s intention, the draft legislation should be amended accordingly.
Following the enactment of the legislation in FA 2016, a letter from HMRC to the National Landlords Association offered assurance that investors who buy properties to let out to generate rental income, and some years later sell the properties, will normally be subject to capital gains on their disposals rather than being charged to income on such disposals. However, HMRC added that in certain ‘exceptional’ cases (ie broadly involving development of property) the gains will be charged to income tax.
It therefore appears that (for example) the straightforward incorporation of a buy-to-let residential property business was not intended to result in a charge to income tax. However, HMRC guidance on the transactions in UK land legislation in its Business Income Manual does not specifically deal with such incorporations.
In the context of property rental activities generally, HMRC states (at BIM60555):
‘[The transactions in UK land] rules do not alter the treatment of or recharacterise investment activities, except where they are part of such a wider trading activity. In particular, they do not apply to transactions such as buying or repairing a property for the purpose of earning rental income, or as an investment to generate rental income and enjoy capital appreciation.’
Furthermore, HMRC points out (at BIM60560):
‘It may be the case that an investor in UK property expects primarily to benefit from capital growth over time, in addition to obtaining rental yield. The legislation requires that a main purpose of the arrangement is to obtain a gain from disposing of the property. This condition will not be met in the case of straightforward long-term investment, where the economic benefit arising to the owner is the result of market movement from holding that asset rather than transactions that are in the nature of trading.’
There’s always a ‘but’…
However, HMRC goes on to warn that although rental income is often an indicator that the asset is held as an investment, it is not conclusive (eg an asset held for trading purposes could produce rental income over a relatively short period; on the other hand, an asset held over a longer period may for a number of reasons not produce income, but could still be seen as an investment), and the facts of each case will determine whether or not one of the main purposes is to make a trading profit from development and disposal.
HMRC also points out that it is possible for the intention to change over time, at which point the main purpose test would need to be reconsidered, and its guidance features examples in which that test would, and would not, be met.
The above is based on an extract from the Buy-to-Let Property Tax Handbook (2nd Edition). For further information and ordering details please click here.
Mark McLaughlin is the general editor of Buy-to-Let Property Tax Handbook. He is a Fellow of the Chartered Institute of Taxation and a member of the Association of Taxation Technicians and the Society of Trust and Estate Practitioners.