New property tax to replace stamp duty
By Martine Harris
Wed 21 Sep 2016
As we all know, higher rates of SDLT on purchases of additional residential properties, including second homes, came into effect on 1 April 2016 and these higher rates are under consideration in Wales as part of the LTT legislation being introduced later this year.
The Bill was introduced into the National Assembly of Wales on 12 September and is expected to receive Royal Assent in the spring of 2017.
The National Landlords Association has been reassuring its members that despite recent stories, last minute amendments to the Bill at committee stage regarding LTT will not adversely affect landlords, as some had at first thought.
So what does the new Bill entail?
New clauses - 11 to 17 - will introduce the legislation announced in the 2016 budget for a specific charge to income tax or corporation tax on profits from the disposal of land in the UK. The new clauses will ensure that offshore structures cannot be used to avoid UK tax on profits generated from dealing in or developing land in the UK.
New clauses - 11, 12 and 15 - will introduce new rules to ensure that profits generated by a company from dealing in or developing land in the UK will be chargeable to UK corporation tax. Those rules will apply regardless of the residence of the person carrying on the trade and regardless of whether the developer has a permanent establishment in the UK.
New clauses - 13 and 14 - will ensure that the profits generated by an individual from dealing in or developing land will always be chargeable to UK income tax. To prevent tax avoidance, the new charge will also apply where, instead of dealing in land, a developer sells shares in a company that carries on such developments. It will also apply where arrangements are put in place to split profits from development activity between the developer and related entities that could otherwise reduce chargeable allowance. In addition, the Government has strengthened long-standing rules on transactions in land to ensure that they can effectively counter abuse of the new rules.
To support those new rules, the Government is introducing an anti-avoidance rule to prevent manipulation between the policy announcement on Budget day 2016 and the introduction of the new clauses. These measures will raise £2.2 billion over the scorecard period and took effect from 5 July 2016; they will affect developers of UK property who choose to operate from somewhere other than the UK to reduce their tax bills. There will be no effect on companies, based in the UK or elsewhere, whose profits are already fully taxed in the UK.
The changes made by new clauses 11 to 17 will continue the Government’s fight against aggressive tax planning and profit shifting. They will bring the UK in line with other major economies and ensure fair treatment between UK and overseas developers.
The then Chief Secretary to the Treasury stated at the time that:
“This measure is targeted at those who have a property building trade; it does not impact the tax profile for investors in UK property.”
The NLA say that they have now confirmed with the HMRC that these measures are not designed to alter the existing tax arrangements between landlords and HMRC.
HMRC considers that in general, property investors who buy properties to let out to generate property income and some years later sell the properties will be subject to capital gains on their disposals rather than being charged to income on the disposal.
This is an historic milestone in the devolution of tax powers to Wales. Wales has not had control of its tax system since the 13th century when Edward I invaded Wales. This Bill marks another step towards the creation of taxes which are more suited to the needs of Wales and support Welsh public services.
This is a tax which affects so many of us. By replacing stamp duty land tax with a new made-in-Wales land transaction tax, public services in Wales will continue to benefit from the revenues raised by this important tax.
The Government have consulted widely about how this tax should work for Wales and listened to a range of views, and they have also been able to learn from the devolution of the tax to Scotland.
In 2014-15, £170m was raised from stamp duty land tax in Wales, with 55,000 transactions taking place. This is expected to rise to £244m by 2018-19.
Changes to landfill tax in Wales are also due to take place and it is possible that eventually a separate rate of income tax could be set in Wales.