Can you claim capital gains tax relief on incorporation of your property letting business?

A recent tax case, Ramsay v HMRC (2013), has helped provide a bit more clarity in respect of when property letting classes as a business for capital gains tax purposes.

When incorporating a business, relief can be claimed to defer the capital gains tax due on the disposal of any assets transferred to the company, making the company liable for the gain when the asset is sold. However, with property rentals, care must be taken to ensure that the facts show an active business rather than just the holding of investments, which would not qualify for the relief. This can be a grey area and case law is often relied upon to justify a decision.

The judge in the Ramsay case found that the definition of a business should be taken to have a wide meaning for these purposes and specifically stated that declaring the income as rental income on tax returns does not imply that the letting is not a business.

When deciding whether the property letting met the criteria for a business, the main consideration was whether the degree of activity undertaken was sufficient enough to distinguish a business from passive letting.

In this particular case, Mr & Mrs Ramsey spent 20 hours a week on various duties to do with the rental properties. In addition, the rental business was their only occupation. The duties undertaken were predominantly those which an investment landlord would undertake, but it was the degree of the activities which convinced the judge that the Ramsays were in fact operating a business, and as such, were entitled to the relief.

Each property letting business needs to be considered on its own facts before it can be decided whether it would qualify for the relief.

Emily Duffy, Assistant Tax Consultant