Considering Selling Or Investing In a 2nd Property? – Finance Act 2016 Change Explained

November 21, 2016 1:06 pm Published by

Under the Finance Act 2016, there is a new tax law that affects those selling their second properties after 5th July 2016. This law also affects overseas investors by making them pay UK tax on their UK properties they have sold, but not lived in.

In addition to this, the change has affected buy-to-let investors that aren’t investing in property as a trade but do occasional property investing. Find out more about these changes and what they mean for you:

Who Will This Finance Act 2016 Change Affect?

The changes will affect investors who have purchased properties explicitly to rent them out as buy-to-let properties, as well as occasional investors who hold property with the intention to make gains on the property market.

For any affected property income for properties sold since 5th July 2016, HMRC now require individuals to declare the profit on the sale of buy to let or investment property as trading income, as opposed to a capital gain.

The profits made will be taxed as trading income, if any of the following apply:

  • The main purpose of acquiring the land was to make a profit or gain from its disposal
  • The main purpose of acquiring the property which derives its value from the land was to realise a profit from the disposal of the land
  • The land is held as trading stock
  • The main purpose of developing the land was to make a profit from disposing of the land once it has been developed

Property investors will now find the amount of tax they pay increase substantially, this is because the rate of trading income tax is much higher than that of Capital Gains Tax (CGT). The rates of trading income tax are payable at 40% or 45%, as well as National Insurance considerations – both Class 2 and Class 4 NI contributions may need to be paid.

This is comparable to the rates of Capital Gains Tax, which are currently payable at 18% or 28%, on second homes, In addition to the lower rates, most UK tax payers currently have a tax-free capital gains tax allowance of £11,100.


Salary: £20,000, profit on property: £20,000

Tax and Class 1 NI Paid on salary: £3,232

Capital Gains Tax due on property profit: £1,602

Total tax due under old rules up for sales up to 5th July 2016: £4,834

Under the new rule, the same income after 5th July 2016 will be calculated as follows:

Salary: £20,000, profit on property: £20,000

Tax and Class 1 NI Paid on salary: £3,232

Tax and Class 4 NI due on trading income from the property: £5,075

Total tax due for a sale after 5th July 2016: £8,307

As you can see from the example above some taxpayers will be severely affected by this change in rules. In this case the individual would be paying 71% more tax under the new rules.

Why Has HMRC Changed The Rules?

These changes have been put in place to prevent overseas investors avoiding UK tax on profits made from developing land or property in the UK. The aim of the changes is to ‘level the playing field’ between the UK and offshore developers by ensuring they face the same tax rates when carrying out the same activities, whilst preventing arrangements made by developers to avoid paying UK tax on the profits.

How Will HMRC Enforce The Rules?

HMRC has full access to the HM Land Registry Database of transactions, this database allows them to see who owns a property and how much it has been bought or sold for. HMRC will determine whether the individual has declared the income from the sale of the property by matching this information up with the taxpayer’s tax return, then comparing this with the sale proceeds of the property.

HMRC can go back up to 6 tax years for a UK taxpayer and initiate a tax investigation, if they have reason to suspect that not all taxable income has been declared correctly.

Need a Hand?

Here at First Call Financials, we understand how these changes may negatively affect you as an property owner or buy-to-let landlord – If you’re finding yourself affected by these changes or need more information, give us a call on 0117 3790810 and find out what we can do for you.


Categorised in: ,

This post was written by Steph Roffey

Comments are closed here.