Taxpayers that actively manage their property lettings and wish to incorporate their business will welcome a recent decision in the Upper Tribunal (Tax Chamber).
The Upper Tribunal determined that the term “business” in the capital gains tax (CGT) “incorporation relief” rules should be construed broadly and, therefore, ruled that the taxpayer’s property letting activities, which amounted to approximately 20 hours each week, constituted a business for the purpose of CGT incorporation relief. The activities undertaken by the taxpayer in this case included:
- Checking and paying the quarterly electricity bills for the communal areas.
- Carrying out maintenance work (including unblocking drains, repairing garage doors and clearing debris).
- Erecting fence posts and hedging.
- Instructing a firm of surveyors to prepare plans for refurbishing and redeveloping the property, including obtaining planning permission and listed building consent for a two-storey extension, a single-storey extension and other alterations, and obtaining bank funding to undertake the works.
The Upper Tribunal made it clear that it was the day-to-day activities, together with the refurbishment work and development proposals undertaken by the taxpayer that persuaded the tribunal that the taxpayer was conducting a business. This may leave a question mark over whether the day-to-day activities alone would have sufficed. Taxpayers will consequently need to take care to ensure that the level of activities is sufficient to amount to a business.
Rules on relief from capital gains tax on incorporation of a business
An individual (whether a sole trader or a member of a partnership) may be entitled to relief from capital gains tax if they transfer an entire business to a company as a going concern for (in whole or in part) shares in the company.