AccountingWeb has an article warning of a change to UK tax that could affect Property Investors.
The government has introduced a change to how tax is applied to the profit made from selling properties in the UK. Before this change, when you sold a property and made a profit, you paid a tax known as Capital Gains Tax (CGT). Now, for some sales, you might have to pay income tax or corporation tax instead.
Why does this matter? The percentage of tax you pay can be higher with income tax or corporation tax compared to CGT. For instance:
- If you sold a commercial property and made a profit, you used to pay 10% (basic rate) or 20% (higher rate) with CGT. For residential properties, it was 18% or 28%.
- Now, if that profit is considered as income, you could be paying 20%, 40%, or even 45%. If you’re self-employed, you might also have to pay an additional National Insurance tax of 9% or 2%.
Companies, on the other hand, always pay a 20% corporation tax. They have some benefits, like the indexation allowance, which reduces the amount of profit that gets taxed.
So, when does this new tax apply? If you’ve sold a property after 5th July 2016, this new tax rule could apply if:
- You bought the land or property mainly to sell it later for a profit.
- If the property gets its value from the land it’s on, and you bought it to sell later for a profit.
- You’re holding onto the property as a ‘trading stock’ (like goods you plan to sell in a business).
- You bought land, developed it (like built houses on it), with the main intention of selling it for profit later on.
However, if you’re a property developer, you probably already consider the profit from property sales as income. So, you’re not really affected by this change. But if you’re someone who buys properties, waits for the property market to go up, and then sells them, this change can affect you. Landlords, who buy properties to rent out and sell later, might also be affected. It’s going to be challenging for landlords to prove they didn’t buy a property mainly to sell it later for a profit.
Surprise! This new tax rule was added unexpectedly. Initially, the article’s author couldn’t find a reason for the change. But later, it was discovered that the rule was introduced to prevent offshore companies from avoiding UK taxes. Interestingly, the rule doesn’t only target offshore companies; it affects UK-based property investors too.
Confusion Alert! There isn’t any guidance yet from the UK tax department (HMRC) on how these rules will be applied, especially for deciding if a taxpayer falls under the mentioned conditions.
No Sneaky Business You might be thinking, “Why not just transfer the property to someone I know, like a friend or family member, to avoid this tax?” Unfortunately, the new rules have thought of that. They can apply the tax to the original property owner, anyone closely connected to them at the time of selling, or anyone involved in arrangements trying to get profit from the property indirectly.
A Silver Lining There’s one exemption. If you’re selling a property you live in (your main residence), and it’s exempt from the usual CGT, this new rule doesn’t affect you.
In a nutshell: If you’re planning to sell a property in the UK, you need to be aware of these new tax rules, as they might increase the amount of tax you owe.