The case of Ramsay v HMRC (2013)

Is property letting a business for Capital Gains Tax (CGT) purposes?

The incorporation of a business will usually involve the disposal by a sole trader or partnership of chargeable assets such as land and buildings or goodwill to a company.

The disposal will typically be treated as taking place at market value for CGT purposes on the basis that the parties involved are connected persons. However, there is a statutory relief for business incorporations where certain conditions are satisfied. As a result of this relief, any CGT charge on the whole or part of the gains is postponed until the person transferring the business disposes of the shares. In other words, there is an effective rollover of the gains on the disposal of the assets against the cost of the shares.

One of the potential difficulties with incorporation relief is the determination of what constitutes a ‘business’. The problem is that there is no statutory definition of the term for CGT (or income tax) purposes. As a result, in Ramsay v HMRC (2012), the First-Tier Tribunal judges were asked to consider the position.

The Tribunal had to consider whether the taxpayer’s activities in connection with the letting and administration of the property simply amounted to the passive receipt of rent (ie an investment activity) or whether those activities were sufficient to constitute a business. The Tribunal decided that the activities carried out by R were ‘normal and incidental to the owning of an investment property’ and arose out of necessity for the landlord of a property let out as flats.

In the event, R appealed against the First-Tier Tribunal’s judgment and the Upper Tribunal has recently found in her favour. Crucially in Ramsay v HMRC (2013), it was confirmed that the word ‘business’ should be afforded a broad meaning for CGT purposes. The judge concluded that R was carrying on a business and so rollover relief was held to be in point.

For those seeking certainty, it may be worth considering an advance application to HMRC under the non-statutory business clearance service.