After months of waiting and a lot of speculation, HMRC have finally published their guidance on property development tax and the new ‘transactions in land’ legislation that was introduced in the Finance Act 2016.
The new Property Development tax rules can apply where land or relevant property in the United Kingdom is sold at a profit. It makes no difference whether the land/property is owned by individuals or companies and there are ‘anti-fragmentation’ rules which will pull offshore property developers into the regime.
Where one of the following conditions are met, the profit/gain realised is treated as trading activity and subject to either income tax or corporation tax, instead of capital gains tax;
1. The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land.
2. The main purpose, or one of the main purposes of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
3. The land was held as trading stock.
4. In the case where the land has been developed, the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposal of the land when developed.
If you are planning on disposing of some land or a rental property these changes could have a catastrophic effect on your tax bill. In an extreme case, a disposal of land which would have otherwise qualified for capital gains tax at a rate of 10% could now be taxed at a rate of 45% and subject to national insurance as well.
The changes place a lot of emphasis on the intentions of the landowner. So, where a property is purchased and held with the intention of being let to third party tenants, the new legislation should not have any impact on the tax position when it is sold. If it can be proved that those intentions changed however, then HMRC may have scope to apply these rules and seek to collect income tax for the profit made for the period after the date those intentions changed.
HMRC have stated that the facts of each case will determine whether or not one of the main purposes was to make a trading profit from development or disposal. That being said, HMRC are not always consistent in their assessment of transactions.
If you have any queries about the new rules or would like further guidance as to how this might affect you please speak to our specialist tax team on 01603 624181 or email firstname.lastname@example.org