Are my wife and I a property rental BUSINESS?

by Readers Question

8:15 AM, 5th November 2017
About A year ago

Are my wife and I a property rental BUSINESS?

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Are my wife and I a property rental BUSINESS?

Dear Mark

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.

Regards

Raj

Reply by Mark Alexander

Dear Raj

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.”

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

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.

Due Diligence

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

Regards

Mark Alexander – founder of Property118 “The Landlords Union”

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Comments

Michael Holmes

15:58 PM, 11th November 2017
About A year ago

Hello Mark,

I have had some discussions with my accountant about the 20 hours requirement for defining a business as opposed to investement only . It seems to me that it is about time this matter was sorted out in the Courts. My wife and I have three
houses, two of them are 10+ room HMO's, so it is of some interest to us to get a ruling about this matter. I am very 'hands on' and do all the admin., most of the painting and decorating
and running around changing damaged furniture, washing machines, cookers, fridges etc. Plus a good deal of plumbing. It is quite clear to me that we are running a business, but my accountant disagrees, even after consulting other members of the accountancy and tax professions have been consulted, who all seem to back him up. I think it is a matter that the Landlords Union should be campaigning vigorously on, it is long overdue. What say you?

Regards,

Mike Holmes

H B

17:06 PM, 11th November 2017
About A year ago

Very interesting.
I think that you would have to provide good evidence that the agent spends 20 hours a week in this. Is her paid directly or through an agency? If you used £15 p/h as a minimum benchmark, that would amount to about £300 p/w, which would strengthen your case. If it is much less, then HMRC might be quite sceptical.

Mike - it sounds like that would take over 10 hours as you have 20+ separate tenancies. I take it that you don't have any other employment.

Gromit

17:11 PM, 11th November 2017
About A year ago

Reply to the comment left by Michael Holmes at 11/11/2017 - 15:58
Personally I think it shouldn't matter how many actual hours you work. If you sub contract work out to say a letting agent, painter & decorator, etc. Its down to who manages the business after all how many planes does Richard Branson fly (commercially not for personal use)? How many planes does he service? and often does clean/unblock the toilets on them? You say the same for many CEO's and certainly of the FTSE100 companies.

Mark Alexander

17:29 PM, 11th November 2017
About A year ago

Reply to the comment left by Michael Holmes at 11/11/2017 - 15:58
Hello Mike

If you instruct me as your tax consultant and Mark Smith as your Barrister to deal with your incorporation and it is subsequently challenged by HMRC then Cotswold Barristers would defend your case at tribunal at no additional charge if HMRC were to challenge you on the basis of eligibility.

Only clients who proceed can be defended, a Tax tribunal cannot proceed on any other basis.

George Harrison

11:26 AM, 22nd January 2018
About 11 months ago

Is it possible to get SDLT and CGT rollover relief if I only want to sell say 2 thirds of my properties into my limited company as say 1 third of the properties are on good mortgage interest rates which I would lose if they were transferred. I don't want to go down the Bict route as every accountant/tax adviser I have spoken to advises against

Mark Alexander

11:33 AM, 22nd January 2018
About 11 months ago

Reply to the comment left by George Harrison at 22/01/2018 - 11:26
Hello George

You are obviously talking to the wrong accountants.

If you were talking to the right accountants you wouldn't need to ask the questions you have. The HMRC manuals make it very clear that to qualify for the reliefs you would need to transfer the 'WHOLE BUSINESS'.

In regards to BICT, there has been much debate among tax and legal professionals following an extremely controversial article published by The Telegraph.

Here’s a few links to industry feedback on that article ….

https://www.property-tax-portal.co.uk/taxarticle210.shtml

https://www.accountingweb.co.uk/any-answers/beneficial-interest-company-trust-0

I actually spoke to the accountant and the solicitor quoted in The Telegraph article. They admitted to me they knew very little about BICT and had been misquoted by the Newspaper.

Whilst HMRC were still providing a non-statutory clearance service last year we obtained several clearances for clients where use of the BICT structure was fully disclosed.

The Mail also ran a copycat article and at one point we were extremely worried about how this might impact our business. However, the upshot was that with so many accountants, lawyers and even HMRC going through BICT with a fine tooth comb and having no problems with it whatsoever, we now do a lot more business. As they say; ‘don’t believe everything you read in the papers’ AND ‘there is no such thing as bad publicity’.


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