Rent-to-buy tax

Question from Stephen updated on 14th November 2018:

If you are a landlord offering a tenant a rent-to-buy option is the tax on the profit payable from the time of signing or the time of settlement?

Our expert Matthew Gilligan responded:

I think the first question here is whether or not there is in fact tax to pay on the sale at all. In all probability there is, but that would certainly be my starting point.

I would not presume that it is automatically the case. For example, if the property had been bought some time ago and you were now looking to sell it and decided to do so via a rent-to-buy agreement rather than in an orthodox manner by putting it on the market, then the sale would not necessarily be taxable. On the other hand, if the property has been bought with the intention of then being sold via a rent-to-buy arrangement which is entered into immediately after purchase, you are likely to have a taxable sale.

This brings us to your question which is - when is any tax on profit payable? In short, it will not be at the time of signing the agreement. At that point any revenue is not crystallised. The gain on sale is only crystallised as you receive sale proceeds. Thus it will be on settlement that disposal of the property is deemed to occur for income tax purposes.

Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.

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