Nichola Ross Martin's Tax Consultancy

In Elizabeth Moyne Ramsay v HMRC [2012] TC01871, a taxpayer was denied capital gains tax (CGT) incorporation relief because her property letting business was found to amount to holding investments and not running an active business for the purposes of the relief.

Relief under s162 TCGA 1992 - roll over of gains on business asses on incorporation may be claimed on the transfer of a business, as a going concern to a company. The effect of the relief is that any gain on incorporation is carried forward in the cost of the shares acquired. 

• The property rental business was being incorporated prior to redevelopment of the property.
• Once incorporated the new company proceeded with redevelopment plans.

The property business in question consisted of a single investment property: a house converted into ten flats.

• Property business profits were returned under Self-Assessnent as income from property and not trading.
• The taxpayer devoted approximately 20 hours a week to various activities of collecting rents and property and garden maintenance.

The tribunal found that the scale of the activities undertaken was commensurate with the size of the property but that they did not amount to business activities and so CGT relief was denied.

Our comment 

The Tribunal’s findings are as expected in the case of a straightforward property rental business. As often, hindsight is a wonderful thing: if the business has been one of Furnished Holiday Letting, or had the taxpayer turned property developer prior to incorporation then they might have had a better shot at claiming that the business qualified as a business asset for capital gain tax purposes.

It follows that IHT Business Property Relief is also denied on for a property rental business.

Links:

Property profits and losses

CGT reliefs: disposal of business assets

Tribunal report: Elizabeth Moyne Ramsay v HMRC [2012] TC01871

Our Property profits & losses toolkit takes HMRC's version and adds a great deal more about what you can claim! Use this in conjunction with our Practical Tax Guide to Property profit & losses.

Residential property landlords cannot claim capital allowances on assets such as plant and machinery and fixed fixtures used by their tenants, instead they may claim either:

• A 10% wear and tear allowance with extra claims available on the cost of renewing fixtures, or
• Claim the replacement cost of new plant and equipment.

See Wear and tear allowance and renewals basis

Property owners are able to claim a range of different tax allowances on capital expenditure they incur in making improvements to property. 

Commerical property:

• It may be easier to claim the Annual Investment Allowance as an alternative to one of the allowances below.
• The new owner of a commercial property may be able to claim allowances on capital expenditure incurred by the previous owners.

Residential letting property

• No capital allowances can be claimed on the cost of new plant and machinery (fixtures, furniture and equipment) that is used by the tenant.
• Residential landlords may claim the Wear and Tear allowance instead.

Click the allowance to locate the guide:

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When property is held in joint names it is taxed according to beneficial ownership. There is an exception where married couples and civil partnerships hold joint property.

Unmarried persons 

• For most assets held jointly beneficial ownership will equate to legal ownership.
• Where legal title is different, it may be necessary to provide evidence of beneficial ownership for HMRC. This is done by executing a Declaration of Trust
• Where property is held in on trust, the legal owner may not always be the person who has beneficial title to income.
• For more information see Joint property: legal v beneficial ownership

Married couples and civil partners

The basic rule

Where property is held in joint names of husband and wife each spouse is treated for Income Tax purposes as beneficially entitled to the income in equal shares ie 50:50 (ITA 2007 section 836).

The exceptions

The above treatment does not apply to income within any of the following exceptions:

A: Income to which neither of the individuals is beneficially entitled.

B: Income which is taxed according to an unequal beneficial interests declaration (see below).

C: Partnership income

D: Furnished Holiday Letting income

E: Distributions (dividends etc) arising from property consisting of:

a) shares or securities in a close company to which one of the individuals is beneficially entitled to the exclusion of the other, or
b) such shares or securities to which the individuals are beneficially entitled in equal or unequal shares. 

Planning points:

Beneficial ownership or joint names?

For automatic 50:50 treatment under section 838 there is no requirement to show beneficial interest in the property: a simple transfer of the legal title into joint names does the trick. For land and property it is simpler to make a Declaration of Trust than change legal title.

Unequal beneficial interests declaration

Where spouses hold unequal beneficial interests in assets and they wish to be taxed other than 50:50 on income or gains arising on the property they will need to make an election under section 837 ITA 2007 to ensure that each is taxed on the income that corresponds to their beneficial interest.

• The election is made on Form '17 - Declaration of beneficial interests in joint property and income'
• This election cannot be backdated and must be submitted to HMRC within 60 days 
• HMRC changed the guidance to completing Form 17 in 2011: it may now be used for bank accounts and investments
• For more information see Joint property: legal v beneficial ownership

Property partnerships

Income from jointly held property is not generally treated as arising from a partnership. 

A commercial partnership may nevertheless be established to hold investment property, develop or deal in land and property. If so it is taxed as a partnership and will be required to complete a partnership return. 

Beneficial ownership and the settlement legislation

Where beneficial ownership is transferred between:

• Spouses, or
• Civil partners, or
• A parent and a minor child

A settlement may be created.

In the case of a gift by a parent to a minor child, the parent will be taxed on any income arising from the property gifted that is in excess of £100 per year.

In the case of married couple and civil partners a settlement will arise if a gift is not outright, or it only provides a right to income deriving from the property and not to capital.

When the provisions apply any income arising from the property will be treated as being the income of the transferor and not the transferee, the beneficial owner.

The settlement provisions do not apply to transfers between unmarried persons and to adult children by their parents.

See Settlement provisions

Small print:

See Joint property: legal v beneficial ownership for more detailed guidance ownership and transfer of income for tax, elections and Declarations of Trust. 

S836 and 837 ITA 2007