Has the Upper Tribunal exposed a flaw in HMRC’s guidance on landlord incorporation relief?

One sentence in HMRC’s Capital Gains Manual has probably influenced more landlord incorporation decisions than any other. It appears in CG65715 and says:

“You should accept that incorporation relief will be available where an individual spends 20 hours or more a week…”

For many, that sentence has become the starting point for every discussion about section 162 incorporation reliefn and for some, it has become the finishing point as well. Landlords are frequently told that unless they can demonstrate around twenty hours each week managing their portfolio, incorporation relief is unlikely to be available. In many cases, that conclusion is reached before anyone has taken a step back to ask the question Parliament actually posed.

The legislation does not ask how many hours a landlord works; it asks whether there is a business.

That distinction has always mattered, but it may matter even more following the recent Upper Tribunal decision in HMRC v GCH Corporation Ltd and others. Although the case did not concern residential property or section 162 incorporation relief, it did require the Tribunal to consider exactly the same statutory word that lies at the heart of incorporation relief: “Business”.

Parliament did not distinguish between residential property businesses, commercial property businesses, investment businesses or trading businesses. It simply used the word “business” and left it to the courts to determine what that meant, and that’s why the case of GCH Corporation deserves careful attention from anyone advising landlords.

The starting point, however, remains Elisabeth Moyne Ramsay v HMRC. Mrs Ramsay happened to spend around twenty hours each week managing her portfolio and the Upper Tribunal concluded that she was carrying on a business. HMRC quite reasonably reflected those facts in its published guidance, but what is less clear is whether, over time, that guidance has gradually come to be treated as though it represents the legal test itself rather than HMRC’s interpretation of one particular case.

The judgment itself is rather more nuanced.

Judge Berner did not say that twenty hours represented the statutory threshold, nor did he suggest that nineteen hours would fail or that every landlord seeking incorporation relief must personally undertake a prescribed level of activity. Instead, he explained that “it is the degree of activity as a whole which is material”. Those final four words are often overlooked, yet they arguably contain the most important principle arising from the decision.

The emphasis was not on one particular piece of evidence; it was on the business viewed as a whole, and that brings us to GCH Corporation.

The case concerned an LLP whose activities involved acquiring, holding and disposing of investment assets, including shares and loan notes, with a view to making profits. The Upper Tribunal had little difficulty concluding that the LLP was carrying on a business. More interestingly, it reached that conclusion without undertaking the sort of analysis that many landlords have become accustomed to seeing in section 162 discussions.

The judgment contains no detailed examination of how many hours the LLP members personally devoted to the business, or that engaging professionals somehow weakened the existence of the business. In fact, there was no attempt to separate work undertaken personally from work carried out on behalf of the LLP at all. Instead, the Tribunal looked at the commercial reality of what the LLP was doing and concluded that it was carrying on a genuine investment business with a view to profit, and that immediately raises an interesting question.

If an LLP investing in shares and loan notes can constitute a business without analysing the members’ personal hours, why should the legal analysis become fundamentally different simply because the investment assets happen to be residential property?

Consider two simple examples.

The first is the LLP in GCH Corporation. Its assets comprise investments in shares and loan notes, professional advisers are involved, and the members make strategic decisions, oversee the investments and seek to generate long-term profits. The Upper Tribunal concluded that the LLP was carrying on a business.

Now consider a landlord LLP owning just two residential investment properties. A professional managing agent advertises the properties, references tenants, collects rents, arranges repairs and deals with day-to-day administration. The members oversee the business, approve significant expenditure, review financial performance and make strategic decisions about the future of the portfolio.

Both LLPs exist to generate investment returns.

Both hold investment assets.

Both delegate much of the day-to-day administration to professionals.

Both are carried on with a view to profit.

The obvious question is why one should readily be accepted as carrying on a business while the other is often subjected to an entirely different line of enquiry.

That is not a question answered by GCH Corporation, because it was not a section 162 appeal. Equally, it is not a question answered by Ramsay. What GCH Corporation does do, however, is reinforce the principle that the statutory concept of “business” should be approached by examining the commercial reality of the activities undertaken. It does not suggest that investment businesses should somehow be divided into different categories depending upon the type of investment they happen to hold, and that’s where HMRC’s published guidance becomes particularly interesting.

CG65715 undoubtedly reflects the factual circumstances of Ramsay, but does it now place greater emphasis upon one aspect of the evidence than the Upper Tribunal itself intended? Has the twenty-hour example gradually become the focus of the analysis when Judge Berner’s actual conclusion was that “it is the degree of activity as a whole which is material”?

Those are not merely academic questions.

HMRC’s manuals influence the professional advice given to landlords every day. They influence whether landlords decide to incorporate, whether claims are made and, in some cases, whether opportunities are dismissed without any detailed consideration of the business itself. If the Upper Tribunal is now continuing to analyse the statutory concept of “business” by reference to commercial reality rather than personal hours worked, it is reasonable to ask whether the guidance should evolve to reflect that approach more clearly.

None of this means that GCH Corporation has rewritten section 162 or overturned Ramsay. Nor does it follow that every landlord with a small portfolio will qualify for incorporation relief. The availability of relief will always depend upon the particular facts of each case, but what the decision does achieve is something potentially just as important.

It reminds us that the starting point should always be the legislation itself. Parliament asked whether there was a business. It did not ask how many hours the owner worked or distinguish between residential investment businesses and other forms of investment business. It simply chose the word “business”, and the Upper Tribunal has now considered that word on more than one occasion.

Whether HMRC ultimately decides to revisit CG65715 remains to be seen, and likewise, whether future courts draw a sharper distinction between residential property businesses and other investment businesses. What is much harder to ignore is that the latest Upper Tribunal decision has reopened a debate that many advisers may previously have regarded as settled.

Perhaps the time has come to stop asking whether a landlord worked twenty hours each week and start asking the question Parliament asked all along; is there a business?

What does this mean for your own property business?

If nothing else, the recent case law serves as a reminder that no two property businesses are identical and that important decisions should never be made by reference to rules of thumb alone. Whether incorporation is appropriate depends upon the commercial reality of the business, the long-term objectives of its owners and the wider legal and tax consequences of restructuring.

That is why Property118 begins every consultation by understanding your business before discussing possible solutions. Whether your objectives involve improving cashflow, planning for retirement, succession planning, refinancing flexibility or incorporation, our advice is tailored to your circumstances rather than assumptions based on portfolio size or perceived benchmarks.

If you would like an independent assessment of your own property business, together with clear advice on the commercial and tax implications of the options available, book a confidential one-to-one consultation with an experienced Property118 consultant. One conversation could provide the clarity needed before making one of the most important decisions affecting your property business.

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