27 February 2017
To paraphrase the property programme, Location, Location, Location, property owners must now seriously consider something else; intention, intention, intention.
It is well known that individuals who were featured on these types of property programme were always measured on a ‘profit’ element of what impact their actions had on the property. This has been subtly changed to incorporate an expected monthly rental and yield element of their actions, however the main thrust has been the ‘profit’.
Back in the day, although it was never investigated or developed, it was always inferred that the developer would pay Capital Gains Tax (CGT) on this profit and that was most probably correct, depending on circumstances. Now, with the introduction of the new transactions in land rules within the Finance Act 2016, the intentions of the individuals will form a large part in assessing how the expected profits in a property transaction will be taxed.
More specifically, any gains (or losses) arising on the disposal of UK land will be treated as trading income (or losses) if:
- the land was acquired or developed with the main purpose (or one of the main purposes) being to realise a profit or gain on disposal;
- property deriving its value from the land was acquired with the main purpose (or one of the main purposes) being to realise a profit or gain on disposal; or
- the land has been held in trading stock.
Any profit attributable to periods before the intention to develop or sell the land was formed does not fall within the ‘new’ rules and so should still be within the CGT rules.
What has therefore changed?
The answer is that the previous rules for transactions in land cited that the ‘sole or main object’ of realising a profit on disposal was critical for determining the relevant tax. This has been replaced and now only needs to be ‘one of the main purposes’. These rules, therefore, will potentially apply to a much wider range of transactions that could be charged to higher Income Tax rates of tax rather than Capital Gains rates of tax.
If you think you may be affected by the above changes, please do not hesitate to contact me or your local UHY adviser for some guidance on the matter. Alternatively, to read more about the wide range of services we offer to the property sector, click here.