Property Letting: Is It A Business Or An Investment Activity?
You have to consider your activities as a whole ...
For many that manage a portfolio of residential properties, the answer to the question of whether they are carrying on a business will appear an obvious one ...
When does property letting turn from an investment activity into a business?
copyright: stokkete / 123rf stock photo (licensee)
However, HMRC's view for a long time was that the letting of property could not be a business because it was an investment activity.
Whether the letting of property represents a business is critical when you consider claiming the valuable Capital Gains Tax (CGT) Incorporation Relief on the transfer of a property business to a company.
"Where Incorporation Relief is available, subject to certain restrictions, the gains can be deferred!"
This was tested in Ramsay v HMRC (2013). Elizabeth Ramsay was initially denied CGT Incorporation Relief, but this was overturned by the Tribunal on appeal. They decided that the activity of property letting can amount to a business.
Mrs Ramsay owned a block of 15 flats. Which she transferred to a company. The key facts upon which the decision in Ramsay was formed were:
The Ramsay's spent approximately 20 hours per week carrying out various activities
They did not have any other occupation
The property was their only activity of this nature
The range of activities undertaken by the taxpayer included:
Meeting tenants upon taking over administration of the property
Checking and paying electricity bills for communal areas
Dealing with insurance policies.
Undertaking property repairs and maintenance
Liaising with the local Council regarding fire regulations and compliance
Landscaping and garden maintenance works
Cleaning of communal areas and external areas
Clearing and cleaning flats on a change of tenants
Providing assistance to one elderly tenant including liaising with social services
After acquiring a partial interest in the property, the taxpayers instructed a firm of surveyors to prepare plans for refurbishing and redeveloping the property. The Upper Tier decided that the correct approach was to consider whether Mrs Ramsay's activities were:
A 'serious undertaking earnestly pursued' or a 'serious occupation'
They were an occupation or function pursued with reasonable or recognisable continuity
They had a certain amount of substance in terms of turnover
The activities were conducted in a regular manner and on sound and recognised business principles
Of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.
The Upper Tier judgement was based on considering the activities as a whole. Certainly, some of the individual activities by themselves have little impact on the issue; it is the overall position which is important, taking into account both the day to day activities and wider works undertaken.
"This case sets the ground rules for considering whether Incorporation Relief is available to a property letting business!"
CGT is just one aspect to consider when transferring a property letting business to a company and professional advice should be sought. If you'd like my advice, call me on 0333 335 0427 or click here to send me an email enquiry and let's see how I can help you.
Until next time ...
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.