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Bland Unsight

Law Society & Finance Bill Clause 75-78

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From the Law Society website

The government has included new clauses in the Finance Bill 2016 on how profits from trading and investing in UK land is taxed. The clauses were introduced at the report stage in the House of Commons without consulting on the draft legislation.

The Law Society has made written representations to HMRC voicing concerns about the failure to consult on the wording of the legislation. The Law Society also flags substantive issues that exist, particularly the possible unintended effect on buy-to-lets where profits will be taxed as income rather than as capital gains.

From their representation, Finance Bill 2016: clauses 75-78 Transactions in Land - the Law Society's comments.

In particular, we consider that this formulation of the test could apply to many buy-to-let investors, despite the fact that they are clearly engaged in a property investment business on general principles. Any buy-to-let investor will assess the overall yield before making an investment decision. In areas of the country with low rental yields, an essential part of the investment proposition is the prospect for capital growth, even if the investor‟s intention is to hold the property for the medium to long term. Indeed in the current market, and given the low returns on other asset classes, there are few areas where the prospect of capital growth is an immaterial consideration for investors. Financially speaking, it is hard to say that the obtaining of that capital growth would not be one of the main purposes of acquiring the land. However, the average buy-to-let investor will have assumed that it will be taxed at capital gains tax rates on ultimate disposal of the property. If the government‟s intention were to change this, then the Society‟s view is that this should have been subject to proper consultation on the principle policy and the draft legislation. If the government‟s intention is not to change this, then the Society considers that the terms of the legislation should be amended to reflect that.

Just the Law Society jumping at shadows? Or more fun ahead for the buy-to-let guys?

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From the Law Society website

Solicitors are balls deep. Idiot locsl profesionalz who tried to replace falls in earninb by leveraging up.

Income is being taxed as income FFS.

Soliciyors are not accountants. They dont have a grasp of whats invome and whats capital.

They should also know that you have go incoporate to get yhe bendgits and costs of a company.

From their representation, Finance Bill 2016: clauses 75-78 Transactions in Land - the Law Society's comments.

Just the Law Society jumping at shadows? Or more fun ahead for the buy-to-let guys?

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I'll stop you there, chaps...

:lol:

Indeed the objectionable way in which the term 'gross yield' is generally taken to be defined in the BTL game (annual rental income/property price) is good evidence that the contrary is true

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Good work on behalf of the law society as it's what they're there for.

Good work on the part of the government for sticking it to buy to let. Try being in another business and watch yourself get charged 50% as income tax on your share sales (happened to me).

Let's hope it all comes good. I can see why there wasn't a "consultation," on it though.

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That's worrying.

There seems to be an underlying suggestion that a lack of consultation (with whom? over what?) might provide grounds for BTL folks to get the courts to overturn any taxes parliament might impose on them.

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From my reading of the act - it seems to apply to non-UK resident companies and individuals....

My guess is that its being implemented to remove the trick Busta is trying to pull....

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That's worrying.

There seems to be an underlying suggestion that a lack of consultation (with whom? over what?) might provide grounds for BTL folks to get the courts to overturn any taxes parliament might impose on them.

I wouldn't see that as a problem.

They'd have to pay the tax and then work through years of legal challenges to see if they could get it back. In the meantime the new rule influences incentives.

The other thing that strikes me is that the appearance of this new rule at committee stage is consistent with the idea that we are see a sustained and planned attack by the government on the so-called 'highly geared property investment strategy'. This rule will act in concert with Section 24. Section 24 reduces your after tax income from the rent, hence making it more likely that your return comes from the gain, but then this rule might allow HMRC to tax your gain at the income tax rates because Section 24 had reduced your after tax rental income to buttons - making the gain the main purpose of the investment! I'm sure that the Kafkaesque nature of it all is less amusing if you're waking up with a hangover to face another blisteringly hot day in Malta.

Edited by Bland Unsight

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From my reading of the act - it seems to apply to non-UK resident companies and individuals....

My guess is that its being implemented to remove the trick Busta is trying to pull....

I think that in order to (legitimately) outmanoeuvre the Revenue you need really good advice but you also need flexibility, with regard, for example, to capital structure. These unincorporated BTL guys lack that kind of room for manoeuvre. For them, trying to outsmart the people who get to write the rules is always going to be very tricky. As we've already noted banging on about how they are going to do it in the public domain, though amusing for us, never seemed like the sensible option for them.

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'This change will bring non-resident developers of UK property fully into UK tax on their profits from dealing in or developing land in the UK. This will ensure a level playing field between UK developers and those based in offshore jurisdictions.'

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/534947/New_Clause_12-_Corporation_tax-_transactions_in_UK_land.pdf

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From the Law Society website

From their representation, Finance Bill 2016: clauses 75-78 Transactions in Land - the Law Society's comments.

Just the Law Society jumping at shadows? Or more fun ahead for the buy-to-let guys?

In the Law Society's representation they reference this technical note:

Profits from Trading in and Developing UK Land

Background to the legislation

Land is a natural resource of the country in which it is located and the international norm is that profits from land should be taxable in the jurisdiction in which that land is located. The Government believes this is the correct approach to take in relation to trading profits arising from UK land regardless of the residence of the person carrying on the trade.

At a very high level, the territorial limits of the UK’s tax system can be summarised as follows. An initial distinction is made between trading and investment activity, which give rise to income and chargeable gains respectively for tax purposes. Assuming that that there is trading activity a second distinction must then be drawn between UK resident persons trading in the UK, non-resident persons trading in the UK through a permanent establishment, and non-resident persons whose activities in the UK do not amount to trading in the UK through a Permanent Establishment (PE).

UK tax charge on land: Territorial scope

1. Where a person disposes of an investment asset, they will generally be charged to capital gains tax (or, in the case of a company, corporation tax on chargeable gains). Apart from two key exceptions, a person is only charged to capital gains tax in a year where they are resident in the UK for tax purposes (section 2 of the Taxation of Chargeable Gains Act 1992 (“TCGA”)). Those exceptions are residential property (section 1(2A) of TCGA) and assets used by the UK PE of a non-resident company for the purposes of a trading activity (section 10B of TCGA 1992).

2. Where a person is trading, the UK has more extensive tax provisions. A company will be within the charge to UK tax on its trading profits if it meets one of four conditions:

  • if the company is resident for tax purposes in the UK, its worldwide profits and gains will be chargeable to corporation tax (section 5(1) of the Corporation Tax Act 2009 (CTA 2009));
  • if the company is non-resident, and if it carries on a trade in the UK through a PE situated here, the trading profits and certain gains attributable to that PE will be chargeable to UK corporation tax (sections 5(2) & (3) and 19 of CTA 2009);
  • if the company is not resident and does not carry on a trade through a PE here, it may still have a residual liability to UK income tax in respect of its UK source trading profits; or
  • in certain circumstances a company may be charged to the Diverted Profits Tax (Part 3 of FA 2015).
[. . .]

17. The new rules will have no effect on UK developers who are already fully within the charge to corporation tax on property development (but would prevent such companies from obtaining PE exemption if they carried on UK property development through an overseas PE). It follows that there will be no change to the basis on which the profits of UK property developers are charged or the reliefs or other tax rules they can access, so long as they are fully within the charge to UK tax on their profits.

18. The new charge will apply to disposals that occur on or after the date the legislation is introduced in Parliament at Report Stage, expected to be June 2016. To protect the core charge in the interim, anti-avoidance rules come into force with immediate effect from Budget Day, 16 March 2016.

[. . .]

43. The main gateway conditions would look like those in section 819 of CTA 2010. At least one of the following conditions would have to be met:

  • the UK land is acquired with the sole or main object of realising a profit from directly or indirectly disposing of all or part of the land;
  • any property deriving its value from the UK land is acquired with the sole or main object of realising a profit from directly or indirectly disposing of all or part of the land;
  • the UK land is held as trading stock; or
  • the UK land is developed with the sole or main object of realising a profit from directly or indirectly disposing of all or part of the UK land when developed.
[. . .]

45. Part 18 already uses the concept of property that derives its value from land which is defined as including:

  • any shareholding in a company deriving its value directly or indirectly from land;
  • any partnership interest deriving its value directly or indirectly from land;
  • any interest in settled property deriving its value directly or indirectly from land; and
  • any option, consent or embargo affecting the disposition of land.
[. . .]

Example 5

53. M acquires property to let out, it lets out the property for 7 years then sells the property to an independent developer for a fixed sum. None of the four conditions set out in paragraph 45 that must be present are present in this case so the profit is not in scope.

Example 6

54. Company N acquires property to let out as a storage facility, but after 7 years it decides to develop the property into high value personal residences for sale. The fourth condition in paragraph 45 is present (that is, the UK land is developed with the sole or main object of realising a profit from directly, or indirectly, disposing of all or part of the UK land when developed) so the profits from the development are within scope. Profits attributable to the period prior to the decision to develop are not in scope.

FWIW I don't think this is intended to capture BTL generally, but it might capture some people who are using BTL finance products to facilitate trading/development when they probably shouldn't be, according to their T&Cs.

Whether or not this will be clarified in the legislation to a greater degree than it already is (relevant section here) is another matter though, as it might open up a loophole for actual property traders to exploit by pretending to be BTL investors.

Perhaps more likely that HMRC will continue to argue the toss on a case by case basis? Although previously it was BTLers arguing that they were traders, and not the other way around (see this post from a chartered tax advisor for some previous cases).

Still, good stuff that the Gov are focusing in on land taxation a little more, regardless of whether or not it impacts BTL!

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A spokesperson for the Law Society today clarified that the changes may affect all landlords in the UK adding that the important word is “may”, as it is unclear.


He said: “David Gauke [Treasury minister] has said that the measure was not intended to affect property investors but is targeted at those who have a property building trade (which we have referred to in our representations to Government). However, there is a concern that the wording could affect a section of BTL landlords.


“We understand that HMRC may be intending to deal with this issue in its guidance.”


http://www.propertyindustryeye.com/fury-as-major-buy-to-let-tax-amendments-slipped-in-by-stealth/

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