Anti avoidance on profits from UK property dealing

Since 5 July 2016, profits from a trade of dealing in or developing UK property have been taxable in the UK whether the trader is UK resident or not, and whether or not it has a permanent establishment here. Part 9A of the Income Tax Act 2007 and Part 8ZB of the Corporation Tax Act 2010 then treat a gain as a trading profit where a main purpose of acquiring or developing the property was to profit from its disposal, and they reach gains taken through shares in property rich companies, associated parties and overage deals.

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What were the rules designed to stop?

The rules were announced at Budget 2016 to counter offshore structures used to disguise what was in substance a trade of dealing in or developing UK property, and to put onshore and offshore developers on a level playing field. They replaced the older transactions in property rules in Part 18 of the Corporation Tax Act 2010 and Chapter 3 of Part 13 of the Income Tax Act 2007. They apply to disposals on or after 5 July 2016, with anti forestalling rules for transactions from Budget day, 16 March 2016 (BIM60515).

HMRC is clear that the rules do not recharacterise genuine investment. Buying or repairing a property to earn rent, or to enjoy rent and capital growth, is outside them unless it forms part of a wider trading activity (BIM60555). Whether ordinary activity is a trade is still decided by the usual case law tests, covered in the badges of trade and property developer or investor. This page is about the structures the rules were written to catch.

How did the rules change the position of non residents?

Section 5 of the Corporation Tax Act 2009 and section 6 of the Income Tax (Trading and Other Income) Act 2005 were amended so that a non resident’s trade of dealing in or developing UK property is within UK tax regardless of residence or a permanent establishment. Sections 5B and 6B define that trade. A non resident company is charged corporation tax, not income tax, on these profits (section 5B(6) CTA 2009, BIM60535), at the rates explained in corporation tax explained.

The rules also work in the other direction. A UK company that has elected for the foreign branch exemption cannot use it to exclude profits that a foreign branch makes from developing UK property. Section 18A(2A) CTA 2009 keeps those profits in charge (BIM60540).

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When is a gain treated as a trading profit?

Section 517B ITA 2007 and section 356OB CTA 2010 apply where a person realises a profit or gain from disposing of UK property and any one of four conditions is met (BIM60555):

Condition A: the main purpose, or one of the main purposes, of acquiring the property was to realise a profit or gain from disposing of it.
Condition B: a main purpose of acquiring any asset deriving its value from the property, such as shares, was to realise a gain from disposing of the property.
Condition C: the property is held as trading stock.
Condition D: where it has been developed, a main purpose of the development was to realise a gain from disposing of it.

The person taxed can be the one who acquired, held or developed the property, a person associated with them at a relevant time, or anyone party to or concerned in an arrangement that lets the gain be realised indirectly or through a series of transactions (BIM60565). HMRC describes the main purpose test as one of purpose, not of benefit or expectation, so hoping for long term growth on a let building does not meet it (BIM60560).

How do the rules reach offshore companies and share sales?

Selling a company rather than the building it owns is the classic enveloping technique. Section 517D ITA 2007 and section 356OD CTA 2010 deal with it. They apply where a person realises a gain on disposing of any asset that, at the time of disposal, derives at least 50% of its value from UK property, the person is party to or concerned in an arrangement concerning that property, and a main purpose of the arrangement is to deal in or develop the property and realise a gain from disposing of something deriving its value from it (BIM60580). Only the part of the gain attributable on a just and reasonable basis to the UK property is taxed as trading income (section 517E). Value can be traced through any number of companies, partnerships, trusts and similar arrangements (section 517N).

HMRC’s own example is a parent company whose subsidiary builds a block of flats, where the plan from the outset was to sell the subsidiary’s shares once the development was complete. The profit on the share sale is a trading profit of the parent. HMRC also gives an example of someone injecting capital into a company just before a share sale to bring the property value below 50%; that is treated as an arrangement with a main purpose of obtaining a tax advantage and is countered under section 517K ITA 2007 or section 356OK CTA 2010 (BIM60700). The general anti abuse rule sits on top of these targeted rules.

What is the anti fragmentation rule?

Development profit can be spread across associated parties, for example a project management company, a design company and the owner of the site, with only part of the profit taxed in the UK. Section 517H ITA 2007 and section 356OH CTA 2010 apply where the person disposing of the property meets one of conditions A to D and an associated person has made a relevant contribution to the development or to other activities aimed at realising the gain. The two are then treated as one person and the disposing party is taxed on the combined profit. Profits already taxed in the UK are not taxed again, and a payment by the associated person to reimburse the tax is ignored for tax purposes and is not a distribution (BIM60605). The meaning of association overlaps with the ideas in connected persons.

How are overage and slice of the action deals treated?

A landowner who sells a site for a fixed price plus a share of the developer’s profits can be concerned in an arrangement to develop it, so the contingent element can be trading income under condition D. HMRC’s example: a site sold for £10m with 10% of profits above £5m, where the developer makes £8m and pays £300,000, leaves the landowner taxed on the £300,000 as trading income. Deferred consideration that is payable whether or not the site is developed is not caught (BIM60645).

Where the original intention was investment and it later changes, section 517L ITA 2007 or section 356OL CTA 2010 exempt the part of the gain attributable to the period before the intention to develop was formed, apportioned on a just and reasonable basis. HMRC expects to agree a first intention date and obtain a District Valuer valuation at that date (BIM60630 and BIM60650). The earlier part of the gain is then dealt with as a capital gain, calculated as described in how capital gains tax is calculated.

What does this look like in practice?

Illustration only. A company resident outside the UK buys a UK site for £2m intending to build and sell houses, spends £3m on construction and sells the houses for £6.5m. Condition A is met and the £1.5m profit, less allowable costs, is a trading profit chargeable to UK corporation tax in the accounting period in which it is realised. If the company had instead been set up by a parent to hold the site, and the parent sold the company’s shares once the houses were built, the parent’s gain on the shares would be taxed as trading income so far as it is attributable to the UK property.

What does compliance involve, and what goes wrong?

There are no separate returns. Profits are taxed through self assessment or corporation tax self assessment in the tax year or accounting period in which the gain is realised (BIM60625 and BIM60900). Both resident and non resident persons must notify chargeability and register no later than 3 months after coming within the charge (BIM60515).

Assuming a share sale is always a capital disposal, when a property rich company was set up to develop and exit.
Splitting fees and margins across group companies without considering the fragmentation rule.
Treating an overage receipt as extra sale proceeds for capital gains purposes.
Missing the private residence exclusion: section 517M ITA 2007 prevents a charge where the gain is exempt under the main residence rules, or would be except for the rule about homes bought partly to make a gain.
Forgetting that development stock taken out of a trade has its own rules, covered in property trading stock appropriations.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.