Are my wife and I a property rental BUSINESS?Make Text Bigger
The crux of the issue regarding putting BTL properties into a company seems to be whether HMRC will agree that my wife and I are in “business”. This means whether what I do at present can be correctly described as “business”.
If yes, then relief from CGT and Stamp Duty will be given on incorporation.
For the past several years, a Mr K*** has been the agent managing 7 of my 8 BTL properties. I manage through another letting company the 8th property. Before that, I used to manage each property myself without Mr K***.
Mr K*** charges a commission for this and he finds tenants, gets the rent and looks after day to day maintenance of the properties. The tenants in all 7 properties managed by Mr K*** are council tenants and he is registered with the council as agent. I have no direct tenancy agreements either with the councils or with tenants. Mr K*** has legal agreements with council and tenant and I have legal agreements with Mr K** (for each of the 7 properties) as my agent.
Each month, Mr K*** sends me the rental statement on all 7 properties and deposits the rent in my bank minus his commission and minus any repair charges.
Therefore, even if I can list things Mr K*** and I do per week, taking >20 hours per week regarding these BTL properties, will HMRC agree that my work with properties at present classifies as “business”? That seems to me to the the root issue.
I have booked a consultation and shall ring you soon. I may also request the barrister’s opinion but please give yours for now. Meanwhile, I am copying this email to my accountant and would be grateful if you would do the same with your reply.
Reply by Mark Alexander
Thank you for your email.
I have cc’d my opinion below to both your accountant and to Mark W Smith, Barrister-At-Law and Head of Chambers at Cotswold Barristers.
Your concern is: “whether HMRC will agree that my wife and I are in business“.
In the HMRC Internal Manual PIM1020 it is stated that ….
Who carries on a rental business?
Any person or body of persons carries on a rental business if:
- they own or have an interest in land or property in the UK; and
- they enter into transactions that produce rents or other receipts liable to IT or CT from that land or property.
The list of those who carry on a rental business includes individuals, partners, trustees, personal representatives, trustees in bankruptcy, and non-resident companies subject to IT on their income from property. For more about trusts see PIM1045.
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.”
It is my understanding that between you and your contracted agent you spend in excess of 20 hours a week running your property rental business.
On this basis, my pragmatic opinion is that you will be able to roll your capital gains to date into shares in your new company.
This is confirmed in HMRC manual cg65700 as per the snippet below.
“TCGA92/S162 applies where a person other than a company transfers a business as a going concern with the whole of its assets (or the whole of its assets other than cash) to a company wholly or partly in exchange for shares. Provided that various conditions are satisfied, see CG65710, the charge to CGT on the whole or part of the gains will be postponed until such time as the person transferring the business disposes of the shares.
The way the relief works in practice is that all or part of the gains arising on the disposals of the assets are ‘rolled over’ against the cost of the shares.
Relief under TCGA92/S162 is sometimes referred to as ‘incorporation relief’.
A claim is not required because the relief is automatic.”
I agree that they key factor in regards to your eligibility to utilise this relief is that it is only applicable if you are running a business.
The only possible area of ambiguity, which in theory HMRC could challenge, is in regards to time spent running the business and whether the relief is applicable based on their interpretation of case law. They make reference to this in their manual CG65715, a snippet of which is below.
“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.”
This can be read in a few ways, i.e. if you spend less than 20 hours a week running your property rental business then HMRC may or may not conclude that you are running a business which is entitled to claim incorporation relief.
If HMRC were to conclude you are not running a business this would be at odds with their own manual PIM1020.
The HMRC manuals do not say that you are not running a business if you spend less than 20 hours a week doing so. It is impossible for them to suggest this with any certainty because the matter has never been tested in Court, hence there is no case law.
It is important to bear in mind that HMRC have never challenged incorporation relief for individual landlords since they embarrassingly lost at Tribunal against Elizabeth Moyne Ramsay in 2013.
Mrs Ramsay owned one property which was split into 10 flats, of which 5 of the flats were let. HMRC accepted that Mrs Ramsay committed 20 hours a week running her rental property business, presumably because it would be impossible for them to prove otherwise without monitoring her every activities 24 hours a day for a whole year in order to provide evidence to the contrary. No Court in the land would ever allow such an imposition and invasion of privacy.
Therefore, based on the above, you will understand why I have suggested that a pragmatic view needs to be applied.
Earlier this year I might have recommended seeking non-statutory clearance from HMRC prior to entering into a transaction of this nature. However, not only have HMRC closed their non-statutory clearance office in Southend-on-Sea, their Technical Department in Solihull have told all inspectors to stop giving landlords clearance that they are a business for the purpose of claiming rollover relief under s162 TCGA 1992. There has been no change in legislation and to be fair to them they have substantially overhauled their manuals to remove ambiguities.
The above appears to have started back in the Spring of this year but has inevitably took some time for HMRC to brief all inspectors. This would explain why we were still getting clearance letters right up until the end of July, but there have been none since.
Given that the non-statutory clearance option effectively no longer exists for landlords, the next best thing is counsel’s opinion from a Barrister-At-Law who is qualified, experienced and insured to provide the advice you require. The advice we recommend is provided by our Hon. Legal Counsel, Mark W Smith, Head of Chambers at Cotswold Barristers. One of the reason I recommend Mark Smith is that in the unlikely event of HMRC challenging your case he would provide advocacy at no additional charge. He is also the Barrister who helped me to win my representative action case against the West Bromwich Mortgage Company which ended in us winning in the Court of Appeal and recovering 100% of cost and £27,500,000 of overcharged mortgage interest.
TO PROGRESS MATTERS
If counsel agrees with this communication he will then send you a Client Care Letter in regards to acting on your behalf in regards to the legal matters associated with your implementation of the incorporation, and an the basis of you instructing him in that regard he will indemnify this communication as being his own advice.
All the best
Mark Alexander – founder of Property118 “The Landlords Union”Show Book A Tax Planning Consultation Form
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