Our properties are managed, does this mean we cannot claim incorporation relief?

by Readers Question

3 months ago

Our properties are managed, does this mean we cannot claim incorporation relief?

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Our properties are managed, does this mean we cannot claim incorporation relief?

My husband and I live overseas but we have a portfolio of 38 rental properties spreads across the UK. We are considering incorporation for a variety of reasons, one of which is that Limited Companies are unaffected to the section 24 restrictions on finance cost relief for individual landlords.

Does the fact that our properties are managed automatically mean that we are not eligible for incorporation relief?

Our accountant was unable to answer this question. His view was that we need to prove that we spend 20 hours a week running our property rental business to be eligible. Now we do spend quite a lot of time dealing with accounting, insurance, keeping an eye on what our agents are doing and general correspondence. Whether we each spend 20 hours a week doing this is debatable.

We would very much appreciate any links to HMRC manuals or legislation on this point.

Thanks in advance

Helen

 



Comments

Mark Alexander

3 months ago

Hi Helen

HMRC's Manual PIM1020 says "A person will carry on a rental business even if they engage an agent to handle it for them. The person carries on the business through the agent."

LINK https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1020

Note that outsourcing work to an agent does not absolve you of your legal obligations, e.g. to protect tenants deposits or to obtain annual CP12 gas safety certificates.

HMRC's manual CG67515 says "You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business. Other cases should be considered carefully."

LINK https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65715

The manual DOES NOT SAY that spending less than 20 hours a week makes a person ineligible for the relief. A pragmatic view needs to be taken.

Take Richard Branson for example; if he had to work 20 hours a week in each business he owned there would not be enough ours in the day. Similarly, just because he doesn’t fly his airplanes, or service them, or serve food and beverages to his passengers, this doesn’t mean that Virgin Atlantic isn’t a business does it?

Also, how does HMRC measure time? They cannot possibly monitor your activity 24/7 for 365 consecutive days. Perhaps that's why they accepted that Mrs Ramsay spent 20 hors a week running her property business which consisted of one building containing 10 flats, of which only 5 were let? Perhaps that's also why there have been no similar cases since the Ramsay test case back in 2013?

Our consultation service includes taking a second opinion from a Barrister-At-Law who is qualified, experienced and insured to provide an opinion on whether you are eligible to claim incorporation relief. There is no additional charge for this service for consultation clients of Property118 Limited.

To book a private consultation please see the link below.

https://www.property118.com/book-a-consultation/

I agree with these comments.

Although the CGT manual might be considered to be at odds with the PIM, if a business qualifies under PIM it would be hard for HMRC to say that they have rejected it for incorporation relief after 'careful consideration'.

Craig Rennolds

3 weeks ago

Hi Mark,

I intend to incorporate through your self and Mark Smith but I do have a few questions:-
1) If on incorporation I was to include my daughter as a director and subsequently she wanted to buy a property in her own name, does this mean I would have to lend her the money and we would have to pay tax as say a dividend and salary ? Or as I think is a better solution, she buys through the limited company and there is little or no tax as the company is simply increasing its portfolio?
2) I have spoken to a few brokers who apart from wanting to completely re-mortgage my whole portfolio and the fat fees this would attract, have said the complete portfolio would need to be stress tested. My understanding is that stress testing the portfolio is for property owned in my own name.
I have other questions but I will discuss these privately.
Craig Rennolds


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