The gains on property investment transactions of individuals and trusts may now be subject to income tax, rather than capital gains tax, as a result of a change to new legislation made by the Government without any consultation.

During the consultation phase of the new transactions in land rules, the income tax charge only arose where the “sole or main object” of the taxpayer was to sell the land at a profit. But now that the Finance Act 2016 has been passed, the income tax charge arises where the main purpose “or one of the main purposes” is to sell the land at a profit.

Even when acquiring a pure investment property, an owner is likely to have an ultimate disposal for a profit as “one of the main purposes” of buying or developing the land. The new legislation specifically excludes main residences from its ambit but does the new wording mean that all sales of buy-to-let properties are now subject to income tax?

In its recently available draft guidance, HM Revenue & Customs (HMRC) says that the new legislation is not intended to catch investment transactions. Indeed, in one section, this view is stated six times. The problem is that this is just HMRC guidance to be included in its tax manuals. It is not legislation and, in fact, it seems to contradict the legislation.

The guidance says that the new rules do not apply to transactions such as buying a property either for the principal purpose of earning rental income or as an investment to generate rental income and enjoy capital appreciation. This is not what the legislation says. The legislation permits an income tax charge where the principal purpose is to earn rental income, provided that another main purpose is to make a gain from selling the land. And, if a property is bought to enjoy capital appreciation, then surely a main purpose must be to sell it for a profit – unless there are property owners who are only interested in making paper rather than actual profits.

Giving the example of a buy-to-let investor who considered capital appreciation as one of the factors in the purchase and sold the property after seven years, HMRC says that the new rules do not apply in that situation. It says “whilst the long term capital appreciation could be a main purpose, it is clearly not a profit from a disguised trading transaction”.

But the legislation never mentions “disguised trading transactions”. It just says that the gain is taxed as income if one of the main purposes is to sell the land at a profit. HMRC is inserting rules into the guidance which are simply not present in the legislation. Furthermore, HMRC often argues in court that it is not bound by the content of its manuals and it is free to change them without seeking Parliamentary approval if it changes its mind about the meaning of the legislation.

This is an example of legislation by guidance. The legislation passed by Parliament is all- encompassing and HMRC subsequently decides for itself which behaviour to attack. This is not the role of HMRC, which is to collect tax on the basis of the laws passed by Parliament, not to make up the rules itself.

Buy-to-let investors are now in a position where they do not know whether their gains will be taxed as income or not. This decision is in the hands of their Inspector of Taxes and the draughtsmen of HMRC guidance.