In Elizabeth Moyne Ramsey v HMRC [2013] UKUT 266 TC the Upper Tier Tax Tribunal allowed the taxpayer's appeal and decided that residential property letting is a business for the purposes of roll over relief under s162 TCGA 1992 (incorporation relief). HMRC has long argued that there is no business in ordinary letting as it is an investment activity.

Section 162 roll-over relief on transfer of business provides relief for Capital Gains Tax purposes where an individual or partnership transfers a business and its assets as a going concern wholly or mainly in exchange for shares issued by the company.

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

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

Back in 2012, the First Tier Tax Tribunal (FTT) 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.

The UTT decided that the FTT had erred in law and decided that ordinary property letting:

  • Is not a trading activity - Griffiths v Jackson; Grifiths v Pearmain 56 TC 583.
  • For IHT Business Property Relief is treated as a business, but one of mainly holding investments - Burkinyoung v IRC [1995] STC (SCD) 29 
  • Is not a business activity for NICs - Rachid v Garcia Spc 348
  • Is a business when run by a company - American Leaf Blending [1979] AC 676
  • Was not regarded as a business activity which comprised of chargeable assets for the purposes of CGT retirement relief - Harthan v Mason 53 TC 272
  • Is a business for the purposes of S162 TCGA 1992 roll over relief.

Subject to any appeal by HMRC, this clears up what has been a long standing anomaly. HMRC treat property letting as a business for corporation tax purposes but perhaps as a hangover from the old CGT retirement relief cases have since tried to claim that it is not a business when run by an individual. In the case of s162 roll over this standpoint meant that the same activity was a non-business when owned by an individual and then changed to a business when transferred to their company.

One might wonder why this issue has not come up sooner but on a practical level many taxpayers do not wish to hold residential property inside a company. Also many taxpayers do not use s162 relief because they do  not wish to exchange their businesses for shares because the value of the business is then locked up in shares. There is of course also double taxation when the property is sold. If residential property is held by a company is worth more than £2 million, , subject to certain exemptions for let property, it will be subject to Annual Residential Property tax from April 2013.


Property letting: CGT and IHT issues
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