In our view this makes property business incorporation compelling as a proposition though there are numerous hurdles to get over if you are 
considering transferring a property portfolio to a company.
This includes the need to get the mortgage lender on board and persuade them to refinance the properties in the name of the limited company – which can be time consuming and expensive.
In addition, there are two tax issues to face:
- the addition of Stamp duty land tax if the portfolio is transferred by a sole proprietor and
- the potential Capital Gains Tax (‘CGT’) charge that could arise when you transfer your properties to the limited company.
The basic rule is that a transfer to a connected company, like the transfer to any other connected person, is treated like a sale of assets at their current open market value. On that basis there is a risk of a tax charge where you are treated as having made a gain.
Fortunately, when CGT was first thought of, the problem of tax arising on incorporating a business in a limited company was foreseen and as a result ‘incorporation relief’ was introduced (now in TCGA 1992, s162). This relief was really introduced to help people that wanted to incorporate their sole trader or partnership business into companies to secure limited liability and the ability to expand their business without fear of personal ruin.
The relief is very specific and only applies where a ‘business’ together with all the assets of the business, or all the assets other than cash are transferred to the company as a going concern, and the company issues shares to the transferor in return. It is a very specific relief and only applies in business for share transactions.
Is it a ‘business’?
Those responsible for drafting the statutory rules for incorporation relief didn’t bother to include a definition of what a business was so it has been left up to individual interpretation. In the context of VAT any letting of property is regarded as a business and the definition of business is widely written, this is because it is in HMRC’s interests as it collects more tax. However, when it comes to granting a relief HMRC are less keen to encourage taxpayers down this path.
HMRC make the point that ‘business’ is to be construed more widely than ‘trade’. This is useful for property investors because ‘property investing’ is not usually regarded as being a trading activity. It isn’t necessary to be trading to qualify as a business. The meaning of business is made clearer by some recent caselaw precedent, in the Upper Tribunal’s decision in Elisabeth Moyne Ramsay v HMRC. The key factors to consider in that case were:
- Is there a serious undertaking earnestly pursued?
- Is there an occupation or function actively pursued with reasonable and recognisable continuity?
- Is there a certain amount of substance in terms of turnover?
- Are there activities conducted in a regular manner and on sound business principles?
- Are they of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
The key focus tends to be the extent of the activities, this is reiterated in the HMRC manuals. In the Ramsay case Mrs Ramsay worked on the property for about twenty hours per week and this was found to be sufficient to indicate the carrying on of a business. So, it is fair to say that incorporation relief would be available where a person spends at least twenty hours per week on the property letting.
It cannot be assumed that anyone whose property letting activities take less than twenty hours a week is not carrying on a business, but it will probably be the case that HMRC will not automatically accept this to be the case. So, for those landlords that are not full-time this is another grey area for you to consider.
This is a very ‘all or nothing’ decision because if you transfer your property portfolio to a company and you subsequently find that HMRC do not consider that you have been carrying on a business you could find yourself with a significant CGT bill. It is too late to ‘undo’ the transaction by the time you find out what the consequences are. It is possible to obtain pre-transaction clearances on this very question, although Bedrock was informed recently that HMRC are lacking the manpower to provide clearances at the moment – who knows if this will change!
Is incorporation right for you?
Together with other statutory reliefs, incorporation can, in certain circumstances, provide a tax efficient solution with fantastic ongoing savings for those carrying on a property business.
Suitable for clients or contacts who:
- Own residential and/or commercial properties with a combined market value of at least £2 million
- Let a number of properties
- Manage their property portfolio as a business
To find out more take a look at this case study which sets out how we worked with a client on their property business incorporation. Alternatively give us a call to discuss whether you or any of your clients should consider the cost benefits of incorporation.
