Until quite recently, many professional advisers (including myself) have argued that a partnership doesn’t exist unless HMRC has issued a rental property Partnership Unique Tax Reference number “UTR” and that three years of partnership returns have been submitted and accepted.

However, earlier this year I was made aware of HMRC issuing non-statutory clearance for the SDLT exemption of a rental business partnership which was incorporating, without meeting any of the above criteria. 

I’m sorry it has taken me so long to share my research on this, I have been too busy helping paying clients to obtain non-statutory clearances for themselves!

The key to this matter are the words “business” and “Partnership”.

HMRC’s manual SDLTM33100 states as follows:-

“Where an entity does not carry on a business there will not be a partnership and the partnership rules set out in this chapter will not apply: even if the parties are bound by a partnership deed.” I have emphasised the word business in bold.

The manual also states:-

A partnership for the purposes of SDLT is defined as

• a partnership within the Partnership Act 1890
• a limited partnership registered under the Limited Partnerships Act 1907
• a limited liability partnership formed under the Limited Liability Partnerships Act 2000 or the Limited Liability Partnerships Act (Northern Ireland) 2002 or
• a firm or entity of a similar character to any of the above formed under the law of a country or territory outside the United Kingdom.

Again I have emphasised the important words in bold.

So what is a “business“?

“A partnership is defined in the 890 Partnership act as ‘the relation which subsists between persons carrying on a business in common with a view of profit”

Reference https://en.wikipedia.org/wiki/Partnership_Act_1890

So that’s all cleared up then, right?

Sadly not!

If you only own a few properties and the work associated with managing them is predominantly outsourced, HMRC may argue that you are merely curating a passive investment and that you are not entitled to claim incorporation relief on the basis that you are not running a business. If  you are not running a business, then the exemption for SDLT relief at the point of incorporation doesn’t apply either.

Thankfully, there is a way to obtain both clarity and certainty by following a process HMRC call “non-statutory clearance” BEFORE YOU COMMIT, which I will explain at the end of this article. First though, let’s take a look at the ambiguity.

In 2013 HMRC challenged whether a landlord was in fact running a business at Tribunal level, and despite winning initially, an Appeal at the Upper Tier Tribunal concurred that the appellant “Elizabth Moyne Ramsay” was in fact running a business. However, it was far from clear cut – reference http://taxandchancery_ut.decisions.tribunals.gov.uk/Documents/decisions/Elisabeth_Moyne_Ramsay_v_HMRC.pdf

To save you the trouble of reading the entire case the key findings of the appeal ruling are below.

“64. As I have described it earlier, in my judgment the word “business” in the context of s 162 TCGA should be afforded a broad meaning. Regard should be had to 10 the factors referred to in Lord Fisher, which in my view (with the exception of the specific references to taxable supplies, which are relevant to VAT) are of general application to the question whether the circumstances describe a business. Thus, it falls to be considered whether Mrs Ramsay’s activities were a “serious undertaking earnestly pursued” or a “serious occupation”, whether the activity was an occupation or function actively pursued with reasonable or recognisable continuity, whether the activity had a certain amount of substance in terms of turnover, whether the activity was conducted in a regular manner and on sound and recognised business principles, and whether the activities were of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them.

65. In my judgment, taking the activities of Mrs Ramsay as a whole, I am satisfied that these tests are satisfied. Certain of the individual activities by themselves have little impact on the issue, but overall, taking account both of the day-to-day activities, and the work undertaken by Mrs Ramsay in respect of the early refurbishment and redevelopment proposals, I conclude that the activities fall within the tests described in Lord Fisher.

66. There remains, however, the question of degree. That is relevant to the equation because of the fact that in the context of property investment and letting the same activities are equally capable of describing a passive investment and a property investment or rental business. Although resolution of that issue will be assisted by consideration of the Lord Fisher factors, to those there must be added the degree of activity undertaken. There is nothing in the TCGA which can colour the extent of the activity which for the purpose of s 162 may be regarded as sufficient to constitute a business, and so this must be approached in the context of a broad meaning of that term.

67. Applying these principles, in this case I am satisfied that the activity undertaken in respect of the Property, again taken overall, was sufficient in nature and extent to amount to a business for the purpose of s 162 TCGA. Although each of the activities could equally well have been undertaken by someone who was a mere property investor, where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will in my judgment amount to a business. I find that was the case here.”

Questions Unanswered

If Mrs Ramsay had spent less that 20 hours running her business, would she still have been a business?

If Mrs Ramsay had owned less than 10 rental units, would she still be running a business?

I think we can now answer this at least in part because we are aware of a non-statutory clearance for incorporation relief having been issued to a landlord who owns 6 HMO’s. However, those properties had more than 10 tenancies so whilst the 10 property rule is no longer as ‘clear as mud’ we are still left dealing with murky water at best.

Non-Statutory Clearance

In order to deal with ambiguities HMRC provide a service whereby you can check your understanding of how they consider the legislation should be applied to your case BEFORE you commit to making changes.

The process can be utilised to enable you to obtain both clarity and certainty on whether you qualify for incorporation relief and Stamp Duty exemptions on incorporation. If clearance is granted there can be no come-backs from HMRC, unless of course you didn’t tell the truth.

At first glance, HMRC’s checklist looks quite benign. However, it is not!

Your submission needs to be extremely specific about the mechanics of running of your business and your interpretation of how the legislation applies to you. You will undoubtedly need some professional guidance from people with experience and a clear understanding of the legislation. Property118 Limited offer this.

We provide a service to assist you to apply for non-statutory clearance and, so far as we are aware, we are the only consultants offering a refund of fees guarantee if clearance is denied. This service is available exclusive to our Tax Consultancy clients.

To read more about this service please CLICK HERE.

Was this the biggest landlord tax planning event ever?