Landlord claim for CGT relief kicked out by tax tribunal

Landlord claim for CGT relief kicked out by tax tribunal

12:42 PM, 20th April 2012, About 12 years ago 12

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Landlords who have switched personal property investments into a company cannot claim capital gains tax reliefs on the transfers, according to a landmark tax tribunal case.

Traders have claimed incorporation relief on their business properties and assets for many years when changing their status from a partnership or sole trader to a limited company.

The aim is not to burden the business with tax when the trading status changes.

The tribunal denied an appeal by landlord Elizabeth Ramsay to claim the relief for her buy to let business because renting out property is deemed an investment and not a trade under tax law.

For landlords, the decision means transferring property holdings into a limited company triggers capital gains tax on the full market value of the disposal.

In Ms Ramsay’s case, she tried to claim relief for switching ownership of a single property comprising 10 flats into a limited company.

Ms Ramsay argued before the tribunal that the business activities involved in running the flats amounted to more than a ‘passive’ management of an investment as she spent at least 20 hours a week dealing with administration and looking after repairs and gardening at the flats.

The tribunal also heard she worked full time managing the properties and had no other job.

Special Commissioner, Dr. John Avery Jones, felt that whether a property rental was an investment or a business, was a matter of degree and, in that case, having considered all the evidence, considered her input was work to maintain her investment and not enough to constitute a business.

The ruling is disappointing for landlords and is believed to be the first case before a tax tribunal to challenge the view that a buy to let business does not qualify for incorporation relief.

Importantly, the tribunal pointed out that Ms Ramsay made tax returns on the property as an investment rather than a business, which contradicted her own case.

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Paul Lucke

0:13 AM, 22nd April 2012, About 12 years ago

How does one make
 tax returns on one's properties as a business?

Mark Alexander - Founder of Property118

9:05 AM, 22nd April 2012, About 12 years ago

Hi Paul, in the first instance I would suggest you arrange to meet with an accountant for some advice. To find one in your area see the following link

17:50 PM, 22nd April 2012, About 12 years ago

This ruling has very serious implications for a work around to still obtain BTL mortgages on rental income criteria.
Possibly transferring property into a company would have allowed BTL mortgages to still be obtained despite the EU regulation being introduced which will ban such criteria for BTL mortgages.
Another nail in the coffin of small landlord existence or rather any further progression.
This will just leave zombie LL to retain existing portfolios but being able to do no more, not even remortgaging.
Yes they will still have income but no more possibilities of purchasing more property.
Poorer LL will effectively be in the position of FTB.
Not enough income and not enough deposit.
So where are all the new tenants going to live if there is very little supply coming onto the market.!?
Of course one could see that LL who have a negative equity portfolio could transfer into a company as they would have no capital gains to concern themselves with.
It maybe that via a company LL could still obtain BTL mortgages on rental criteria.
A bizarre situation wherein successful LL would be stopped in their tracks because of capital gains issues compared to unsuccessful ones who have no capital gains to concern themselves with, may yet progress potentially purchasing more property on rental income criteria.
I know BTL lenders are working furiously behind the scenes to amelierate this problem and even prevent the EU regulation coming in.
But you would have thought by now govt should have been able to state what will happen.
Whilst no one knows what is going to happen LL will put things on hold.
How this is supposed to assist the ongoing tenant demand I don't know!?

Mark Alexander - Founder of Property118

11:22 AM, 23rd April 2012, About 12 years ago

Calm down Paul, there's always a way around these issues. What's to stop a people creating a company to manage their properties, applying for a commercial loan in the name of that company and then proving a personal guarantee for the loan secured by mortgages over buy to let properties owned personally? The security to the lender is identical, the buy to let owner doesn't need to transfer properties so CGT and Stamp Duty are irrelevant and the EU rules will not apply to the loan as its a corporate borrower using the money for business purposes.


15:52 PM, 23rd April 2012, About 12 years ago

sorry guys wrong it is possible to have negative equity and still be liable for capital gains tax
also how are you going to refinance property with negative equity? please introduce me to that lender
cant see any lender willing to lend money to a ltd company on the basis that the property is owned by a thirdparty ie director ,where is the direct line of securitisation even with personal guarantee can you imagine the fun the lender would have in obtaining possesion in default why would they take the risk and at what rate of interest
bye for now
tony altman

19:47 PM, 23rd April 2012, About 12 years ago

Heres hoping these work arounds will work and be expedient.
There will be lots of LL out there who will need and wish to avail themselves of such a situation.
What happens though with LL who have positive cash flow but massive negaive equity.
The will become zombie LL if they do not have to remortgage.
Also arn't commercial loan terms short term as a matter of course.
For most LL they will be entering areas of finance beyond their normal understanding.
Possibly a window of business opportunity for you to provide ready made solutions for these inevitable circumstances.

Mark Alexander - Founder of Property118

20:53 PM, 23rd April 2012, About 12 years ago

Hi Paul

It's early days yet so let's wait and see what happens. There's no point building a business model for something that may never happen. To answer the other points raised, whatever happens regarding EU regulation, landlords with little or no equity or even negative equity are stuck with whatever arrangements they have previously made. Perhaps more to the point, their lenders are stuck with them!

21:11 PM, 23rd April 2012, About 12 years ago

Yes i agree, the problem though will be for LL who have been on fixed rates will have to proceed onto SVR.
These could be anything the lender chooses
Personally I'm stuck with 2% above BBR foe the next 20 years!
Others are at the mercy of whatever a lender decides will be their SVR.
A very worrying time for LL coming off fixed rates.

Richard Jones

17:06 PM, 24th April 2012, About 12 years ago

As Policy Director for the Residential Landlords Association I can confirm that we along with the British Property Federation the National Landlords Association and the Council of Mortgage Lenders are all working hard to counteract the draft EU Residential Mortgages and its potential adverse impact on BtL. The signs are looking hopeful. Vicky Ford MEP for East Anglia has been particularly helpful. The Treasury are also playing their part.

The problem with this decision is that it overturns long established accepted HMRC practice to treat tranfers of reidential lettings to companies as businesses for the purpose of allowing gains to be held over, when incorporating. This has been a key element of tax planning. There has always been some doubt as to whether it applies to a single property as here but if it is of general application so that it means that you can no longer hold over gains one important tax planning avenue is closed down

1:48 AM, 25th April 2012, About 12 years ago

It is very worrying then .
It seems a virtual storm;  a major tax plannng avenue cut off.
EU regulation looking more than likely.
On what basis do you think you will be able to counteract this draft  regulation.
The EU is mightier than all of you.
I think the BTL industry is on it's way to hell in a handcart!
Particularly for small LL.
Reduction of lending criteria has destroyed the residential sales market particularly for the FTB.
The same thing WILL happen to the BTL lenders with this EU BTL regulation introduced.
Are there any recent examples of where an EU regulation was not brought into force because of action by this govt.
I can't think of any.
I have to say I am very pessimistic as to what is going on.
I will operate my properties on the basis that these restrictions will be coming in.
To be so pessimistic I know is not very optimistic!; but I can't see the govt stopping this EU regulation and HMRC are certainly not going to  allow reinstatement of this tax saving measure for LANDLORDS.
It seems to me that the BTL industry is under wholesale attack, just at the time when it is needed most.
If this is an example of the govt looking after the country's interests then God help the UK.

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