Senior tax partner George Bull said the Chancellor should start a structured debate on how the tax system ought to deal with income and with long- and short-term gains, in a way that “meets the broadest needs of the country in a demonstrably equitable fashion”.
He said the current system was designed to “discriminate in favour of long-term returns” in that long term gains are often taxed capital gains tax, where those deemed short term are subject to income tax – the higher rate of the two.
However, on taxation of property returns the distinction has become blurred, often making it unclear which tax should be levied based on a test of main benefit, he said.
The taxation issue was put in the spotlight by a recent alteration to the Finance Bill, which, some claimed, threatened to push BTL investors into paying income tax on all earnings.
Solicitors’ body the Law Society had pointed out the government had introduced a “main purpose” test in place of the “sole or main object” test for BTL tax, which could have captured a wider range of transactions under rules initially designed for tax avoidance purposes.
However, the Treasury has since written to industry associations to reassure investors it was not its intention to trap them in this way.
Bull said: “After the uncertainty raised by the changes in the Finance Bill the government needs to be very clear as to whether property gains are going to be charged the capital gains tax and what property gains are going to be charged the income tax.
“I don’t think it’s clear when you look at the idea of a main benefit how that applies to buy to let property.”
He said: “At the moment it seems HMRC says one thing, the legislation says another and Parliament says a third, It’s time the government is clear about [who pays what tax].”
Generally speaking, under current rules BTL investors pay capital gains tax (CGT) on the proceeds they make from selling their assets but pay income tax on their rental profits.
The CGT rate is much lower than income tax, especially after it was significantly cut in the 2016 Budget. So from April 2016, basic-rate income tax payers pay 18% in CGT on residential property and higher-rate taxpayers are charged 28% CGT.
Income tax, on the other hand, is currently 40% for anyone earning more than £43,000 a year, rising to 45% for the highest rate payers.
The Finance Bill is currently in the House of Lords where it was last debated on 13 September. However, the House of Lords cannot amend money bills so committee stage, report stage and third reading are just formalities.
A spokesperson for the Law Society said: “We welcome HM Treasury’s further assurances that changes to the Finance Bill were not intended to target buy-to-let investors. We would encourage HM Treasury to clarify this point in the Bill, to ensure that the legislation is in line with the Government’s stated policy intention.”
New Chancellor Philip Hammond will hold his first Budget speech on 23 November after being appointed to the role in May.