Q- A client has a rental portfolio of 8 properties and wishes to claim incorporation relief under section 162 TCGA 1992.
A- Many clients who have a portfolio of rental properties are becoming increasingly aware of the changes to income tax relief in respect of mortgage interest relief. They wish to incorporate the property business and if possible take advantage of incorporation relief.
The starting point to answer a question like this would be to consider whether or not the property portfolio is a ‘business’ or a passive investment asset because this is the basic requirement to qualify for incorporation relief. Unfortunately, the word ‘business’ is not defined in section 162 TCGA 1992, the legislation which deals with incorporation relief.
HMRC does not generally accept that the term ‘business’ can relate to merely renting out properties. This is clearly a passive activity where a person is simply holding assets that generate an income without necessarily being involved to any significant extent. In many situations, landlords will simply appoint a managing agent.
However, following the case of Elizabeth Moyne Ramsay v HMRC , HMRC now accepts that ‘business’ has a wider meaning than ‘trade’. In Mrs. Ramsay’s case, she was able to show that she spent up to 20 hours per week in actively dealing with matters arising from the letting portfolio and therefore that it truly was a ‘business’.
HMRRC has since revised its guidance (at CG65715) to “accept that 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.” However, our view is that this is unnecessarily restrictive and that it may be possible to show that a business exists even if a lesser amount of time is spent. HMRC also admits this is possible though “other cases should be considered carefully“.
The question is subjective and the onus is on the taxpayer. It would be helpful to be able to demonstrate that, for example, the landlord collected rents and handled the properties personally, rather than relying on managing agents. Better yet if it can be shown that the landlord spent a considerable amount of time in meeting with tenants to identify any problems and then liaising with contractors to deal with all faults and address them.
On that basis, we believe the client would have a reasonable basis to claim incorporation relief.