Not clear! ‘Business’ and incorporation relief

The UK tax system is extremely complex. The tax legislation is voluminous and almost impenetrable in parts. There are many ‘grey areas’ resulting in uncertainty for taxpayers and professional advisers.

Is that ‘clear’?

Fortunately, HM Revenue and Customs (HMRC) is required by law to provide taxpayers with the facility to apply for clearance on the tax treatment of certain transactions and events. Information on statutory clearances is available on the website (

In addition, HMRC offers a ‘non-statutory clearance service’ in certain circumstances where there is no provision for a statutory clearance (see HMRC will generally provide a written view on areas of uncertainty about its interpretation of the tax law, where the answer cannot be found in HMRC’s guidance (or by contacting one of its helplines).

When HMRC won’t help

Unsurprisingly, HMRC will not ‘approve’ tax planning arrangements or give advice on the tax treatment of transactions which HMRC considers are for tax avoidance purposes.

However, the non-statutory clearance service can be helpful in terms of obtaining certainty about HMRC’s view on proposed transactions.

It was therefore unhelpful that HMRC announced in April 2018 two further circumstances in which it will not give assistance.

1. Is it a ‘business’?

HMRC will not give a clearance on ‘matters of fact’. This includes whether or not activities constitute a ‘business’. Whether a business exists can be important for various tax purposes. It has become a potential issue for many buy-to-let landlords in particular.

Following the introduction (from 6 April 2017) of a restriction in tax relief for finance costs (e.g. loan interest) in respect of residential properties, many individual landlords have considered transferring their rental properties to a limited company, as the finance cost restriction does not apply to companies. However, transferring properties to a company (‘incorporation’) has implications for capital gains tax (CGT) purposes (and potentially also for other taxes, including stamp duty land tax or its equivalent in Scotland and Wales). The property transfers are deemed to take place at market value for CGT purposes, possibly resulting in chargeable gains arising on increases in value since the properties were acquired.

However, a specific CGT relief is available upon incorporation (see below). One of the conditions for ‘incorporation relief’ is that there is a transfer to the company of a business as a going concern.

For incorporation relief purposes, it is therefore necessary to consider whether the rental property activities are sufficient to constitute a business. Unfortunately, there is no statutory definition of ‘business’. This has resulted in various tax cases over the years involving disputes between HMRC and taxpayers on the issue.

HMRC openly admits in its Capital Gains manual (at CG65715): “It is not easy to draw the line” on whether a particular activity constitutes a business. Nevertheless, HMRC will no longer give a clearance on this issue (or other “matters of fact”).

2. Rental property: Incorporation relief

If a rental property (or other) activity carried on by one or more individuals constitutes a business, it means that CGT ‘incorporation relief’ (under TCGA 1992, s 162) is available upon transferring the business to a company if certain conditions are satisfied.

Incorporation relief is often desirable to landlords of rental property businesses wishing to transfer the properties into a company, such as for the reasons explained above. As mentioned, the properties may be worth more than their original cost to the landlord, so transferring the properties (at market value for CGT purposes) could result in a significant CGT bill, without any disposal proceeds.

If the relevant conditions are satisfied and incorporation relief applies without restriction, net chargeable gains on the properties are effectively ‘rolled over’ and deducted from the base cost of the company’s shares.

However, the incorporation relief conditions can cause uncertainty. For example, there is a requirement for the transfer to a company of a business as a going concern. HMRC considers this ‘going concern’ requirement indicates that something more than a collection of assets must be transferred (CG65710). Many landlords seeking incorporation relief will want certainty that HMRC would consider their rental property activities to satisfy the going concern requirement.

HMRC amended its guidance in April 2018 to state that it will not give clearances in relation to the application of TCGA 1992, s 162 to property income. Strangely, this amendment was subsequently removed. However, HMRC’s refusal to comment on whether activities (e.g. property rental) constitute a ‘business’, and other ‘matters of fact’, remains in place.

Practical point

Landlords might find the case Ramsay v Revenue and Customs [2013] UKUT 226 (TCC) helpful on the meaning of ‘business’ in the context of rental property activities and incorporation relief (see HMRC subsequently amended its guidance, and states (at CG65715): “Mrs Ramsay was found to have worked on the property for about 20 hours per week which was found to be sufficient to indicate the carrying on a business. 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.”

The above article was first published in Tax Insider (October 2018) (

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