Editor's note: This brief was summarised by The Property AI Newsroom from a report by Property118. Read the original article for full details.

Upper Tribunal Decision Prompts Rethink on HMRC Landlord Incorporation Relief Guidance

A recent Upper Tribunal decision has raised questions about HMRC’s guidance on landlord incorporation relief, particularly the emphasis on hours worked. The case has drawn attention to the legal definition of “business” in the context of incorporation relief for landlords.

One sentence in HMRC’s Capital Gains Manual, found in section CG65715, states: “You should accept that incorporation relief will be available where an individual spends 20 hours or more a week…”. This guidance has influenced many landlord decisions regarding incorporation, with some interpreting it as a strict requirement for claiming section 162 incorporation relief.

However, the legislation itself does not specify a minimum number of hours worked. Instead, it asks whether there is a “business”. This distinction has become more significant following the Upper Tribunal’s decision in HMRC v GCH Corporation Ltd and others. Although this case did not involve residential property or section 162 incorporation relief, it required the Tribunal to interpret the statutory term “business”, which is central to incorporation relief.

The article notes that Parliament did not differentiate between types of property or investment businesses when using the term “business”. The courts are left to interpret its meaning. The case of Elisabeth Moyne Ramsay v HMRC is cited as a key precedent, where Mrs Ramsay spent around twenty hours per week managing her portfolio and was found to be carrying on a business. HMRC’s guidance reflects these facts, but the article points out that the guidance may have come to be seen as the legal test itself, rather than an interpretation of one case.

Judge Berner in the Ramsay case did not set a statutory threshold of twenty hours, nor did he suggest that a lower number of hours would fail the test. Instead, he stated that “it is the degree of activity as a whole which is material”. This principle, according to the article, is often overlooked.

In the GCH Corporation case, the Tribunal found that an LLP involved in acquiring, holding, and disposing of investment assets was carrying on a business, without detailed analysis of hours worked or personal involvement. The focus was on the commercial reality and the existence of a genuine investment business with a view to profit.

This development may be relevant for letting agents and inventory clerks advising landlords on incorporation relief, as it highlights the importance of considering the overall business activity rather than relying solely on hours worked.