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September 16, 2016
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Last Minute Changes to the Finance Bill Set to Become Law

Potentially significant changes for landlords and property owners have been introduced to the Finance Bill raising concerns that taxpayers disposing of property will face higher tax rates.

Background

David Gauke MP, now Chief Secretary to the Treasury, introduced the changes during the House of Commons committee stage in July 2016. This stage normally allows for Bills to be examined in detail and allows Parliament to receive advice from experts, interest groups, and the public.

Amendments at this stage are common however no other part of the Finance Bill has received such substantial changes.

The manner of these changes have been criticised by the Law Society of England and Wales and the Residential Landlords Association has called for clarification on the draft laws.

Proposed Changes

The draft laws could see the proceeds from disposals of land and property treated as income for tax purposes rather than capital. This alternative treatment would apply where (broadly) the main or one of the main purposes of acquiring the land was to realise a profit/gain on disposal.

Disposal proceeds treated as income would be subject to taxpayers’ marginal rate of income tax: 20/40/45% for basic/higher/additional taxpayers.

Capital gains tax rates, by contrast, are generally lower; 10/18% for non-residential gains and 20/28% for residential gains in a taxpayer’s basic and higher/additional band.

These new rules would also restrict the availability of the annual exempt amount (£11,100 in 2016/17) which normally exempts a portion of the capital gains from tax entirely.

The draft laws also raise questions regarding the availability of capital gains tax claims including: Entrepreneurs' relief, business asset rollover relief, investments relief, deferred consideration, and gift hold-over relief.

Going Forwards

The government has moved to reassure concerns, insisting that the measures are aimed at property building trades and are not meant to impact landlords of UK property. Therefore the measures are meant to exclude investors who, after renting out their property, later sell it at a gain.

Further amendment to the Finance Bill is unlikely as it has already passed the House of Commons. The Bill’s passage through the House of Lords is largely a formality under existing parliamentary law.

HM Revenue & Customs has said it will issue guidance regarding the new laws in the future.

UPDATE: The Bill has now received Royal Assent and becomes law as the Finance Act 2016.

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