Tax Loopholes to be “Plugged” by Government

Industry Insight December 30th, 2015
Tax Loopholes to be “Plugged” by Government

A new government consultation directed by the treasury has sought to increase the buy-to-let tax on properties and holiday homes bought through corporate investments.

Investment schemes and companies have typically been able to avoid surcharges of other taxes which affect individual landlords. The corporate method could have been a potential loophole to avoid the increase in stamp duty by three percentage points. Now the government are continuing their assault on the buy-to-let market by considering additional stamp duty tax charges on companies from April 2016. Earlier this month, reports were indicating that landlords were rushing to incorporate themselves following the legal changes in taxes. OneSavings Bank, a buy-to-let lender, noted that the number of buy-to-let mortgages to limited companies had doubled from 2,500 a month to 5,000 a month.

What the government fail to consider, however, is that the system of property investment and buy-to-let is effectively a business. Whilst the tax will almost certainly hit small and medium size property investors, it has exempted the corporate entities which dominate the market. These corporate entities do not have to pay the three percent extra stamp duty on large purchases of properties, which does indicate a slight government preference to large corporations instead of small-medium enterprises. If this is the case in actual policy, then smaller landlords with small portfolios with be adversely affected when compared to multi-national corporations, which can avoid any of the currently proposed surcharges.

Furthermore, some property investors are mounting a legal challenge to the tax legislation itself. They argue that the exclusion of the most wealthy landlords and corporations, who can make cash-only purchases, is “a truly absurd” action that is “unfair, undemocratic and underhanded…and also unlawful”.

Most buy-to-let investors will now be hit by the buy-to-let tax surcharge if the consultation becomes successfully implemented into policy. Parents buying, or even co-owning, houses for their children will face the surcharge unless the home is only bought in the child’s name. When investors buy in their children’s name, it must be remembered that they themselves do not have any control over the property. Any rental income belongs to the child and would be taxed under his or her annual personal allowance.

Homeowners who buy a new home before selling their old one will also have to pay the additional stamp tax duty unless they sell the original house within 18 months and apply for a refund. Individuals whose sole property is a buy-to-let investment will also not pay the additional charge. This could enable “Buy-to-Let” surrogacy, whereby a buyer uses a family proxy to buy the property and avoids any additional buy-to-let tax, such as extra stamp duty.

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