Landlords face income tax trap

News at Eden Harper | 02/09/2012

Landlords with rental homes in Battersea and Brixton could fall into an income tax trap when selling their buy-to-let properties, according to the Law Society. 

The warning follows the government adding amendments to the Finance Bill that is due to go before the House of Commons for its report stage on 5 and 6 September.

The changes may result in profits from the sale of an investment property in Battersea and Brixton becoming liable for income tax rather than capital gains tax as at present.

The Law Society says this means anybody who sells an investment property could be forced to pay up to 17% more in tax.

When it comes to investment property sales, CGT is charged at 18% for basic rate taxpayers and 28% for higher rate taxpayers. This is payable on any profit earned on the property minus the current £11,100 CGT allowance and other reliefs available.

CGT is currently charged at 18% on the amount a seller has available in the basic rate band (£11,000 to £43,000).

Given the size of property value increases in Battersea and Brixton, the basic rate band is often used up and the majority of the gain ends up taxed at 28% even if the taxpayer is a basic rate payer for income tax.

Income tax, which private BTL landlords pay on their rental profits, is currently 40% for anyone earning more than £43,000 a year, rising to 45% for the highest rate payers.

The government says the new clauses have been introduced to ensure that offshore structures can’t be used to avoid UK tax. However, the charges are not restricted to offshore structures and apply to UK-based property investors.

The Law Society also claims the new measures have been “slipped in at the committee stage” by the government instead of being part of the formal legislation which is subject to a standard consultation period.

Law Society chief executive Catherine Dixon comments: “The way these changes were introduced starts to feel like legislation by stealth.”

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