Landlord claim for CGT relief kicked out by tax tribunal

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.