Taxation of Transactions in UK Property

In the 2016 Finance Act, new legislation was introduced from 5th July 2016 in relation to the taxation of transactions in UK land. The purpose of the legislation was to target overseas investors trading and developing UK property however the impact is wider reaching than this and many individuals and companies who are affected, both resident in the UK for tax purposes and non UK resident, are unaware of the implications.

Following the changes, some property transactions that may previously have been viewed as capital in nature could now be deemed to be trading and, as such, the gains arising on disposal could be treated as trading profits and subject to UK income tax or corporation tax, depending on structure. Typically for individuals, capital gains tax would be at a lower rate and the individual would also benefit from an annual exempt amount therefore treatment as trading income rather than capital could result in a much higher tax liability.

The UK land transactions concerned are those where the main purpose of acquisition or development was to realise a profit or gain on disposal.

HMRC guidance states that “a trade of dealing in land exists where land and/or property is acquired or developed with a view to profit on disposal”. This does not therefore apply to individuals or companies who acquire and repair properties in order to generate rental income, even if they also benefit from some capital appreciation, but could apply where, for example, a property that has previously been used to generate rental income is subsequently developed or improved before sale.

To establish whether the transaction would be treated as trading, various factors are considered. These include factors such as the length of time that the land or property has been owned, the intention at the purchase date, any change in intention during the period of ownership, how the purchase was funded, how the land or property has been used, whether it is developed or improved prior to disposal and whether there is a connection with an existing trade.

The rules may also apply to property deriving value from land, such as shares in a company where the reason for acquiring the shares was to dispose of land held by the company to make a profit.

These rules and the application of them to the specific circumstances of the individual or company concerned should, along with various other tax issues, be considered when entering into any property transaction.

Rennie Welch LLP accepts no liability on the basis of this article and professional advice should always be sought based on personal circumstances. For advice or assistance with tax planning and compliance matters please contact Lynn Miller at Rennie Welch LLP either by email at lynn.miller@renniewelch.co.uk or by telephone on 01573 224391.