Overseas investors who buy UK residential properties only pay UK tax on the gains accrued since 6 April 2015, and they pay no UK tax on the gains made from selling UK commercial properties. This gives them a big tax advantage over UK-based investors.
The Government has plugged this tax gap for property sales made on and after 5 July 2016, but in the process it has created a risk of higher taxes for many UK-based property investors.
Property developers or dealers (as opposed to landlords) pay Income Tax (at 20%, 40% or 45%) or Corporation Tax (at 20%) on the profits they make from selling or letting their properties.
Individual landlords pay Income Tax on the net rental income they receive, and Capital Gains Tax (CGT – generally at 20% or 28%) on the gains they make when they sell their properties.
The new law treats all landlords as property developers, if HMRC can show that one of the main drivers for buying the property was to make a gain when it is sold. This means the tax they pay on gains will be at the higher Income Tax rates, not the lower CGT rates.
In practice, HMRC will have to assert that the landlord had an eye on the future gain when he bought a property to let out. If challenged, the landlord will have to disprove that assertion. This may be difficult to do when the property has been held for a relatively short period in a rising market.
As yet there is no official HMRC guidance on the circumstances in which it 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.