On the 9 July, David Rickwood, Personal Tax Director for Shaw Gibbs posted the top 10 tax considerations residential landlords need to take into account. Following is my answer to David’s seventh point - are you developing any land and if so, are aware of the difference between income and capital for tax purposes?

Various anti-avoidance provisions were introduced with the aim to charge income tax on profits generated from trading or developing land. The legislation is aimed at land transactions where the profit emerges in a capital form but in essence trading transactions apply. The anti-avoidance rules can apply to any disposal of land where a person is not carrying on a trade and one of the main purposes of acquiring the land was to realise a profit from its disposal or where land is developed with the main or one of the main purposes being to realise a profit from disposal. This is likely to catch those with an intention to develop, the contingent part of consideration of ‘slice of the action’ contracts and a person’s disposal of shares in a company that develops land.

The new legislation is yet to be tested in court and it may be many years before the practical implications of the legislation are fully understood but HMRC have stated that this does not apply to long term investment acquisitions. For tax, intentions need to be established at the outset and this could take many forms such a business plan, a letter to solicitors or accountants. The documentary evidence needs to be dated. The general guidance suggests that the new legislation applies where a profit can be anticipated due to property’s current value at purchase or where a profit is anticipated due to some action to be carried on by the owner.

Where the rules apply, any profits will be treated as profits of a trade and will be chargeable to income tax at rates up to 45%.

The taxpayer is responsible to correctly report the profits on their return and there is no formal clearance procedure. However, an application for advice can be made to HMRC under their non-statutory clearance procedure and therefore agreement on the correct treatment in advance of the return filing.