If your properties have increased in value, Capital Gains Tax could present the biggest hurdle to incorporating your portfolio. This chapter looks at S162 incorporation relief to mitigate CGT.

What is S162 incorporation relief?

Incorporation relief delays the payment of Capital Gains Tax until you sell or dispose of the company shares. If the company is never sold, CGT is delayed indefinitely.

According to HMRC, you must meet the following criteria to be eligible for incorporation relief:

  • be a sole trader or in a business partnership

  • transfer the business and all its assets (except cash) in return for shares in the company

Property business eligibility

Buy-to-let property businesses need to show they are a genuine business to qualify for incorporation relief. This means giving evidence, such as actively managing their properties and tenants, to show they are not just passive investors.

Case study - Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226

The Ramsey v HMRC [2013] tribunal ruled that property letting is a business for incorporation relief.

“Where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will in my judgment amount to a business.” [67. Roger Berner, Upper Tribunal Judge]

Key findings from the case:

  • Activity should outweigh what might normally be done by passive investors

  • At least 20 hours work per week was undertaken by the landlord

Examples of the activities undertaken by the landlord in the case include:

  • Maintenance, such as unblocking drains and conducting repairs

  • Gardening, including hedge pruning, clearing of leaves and removal of algae from flagstones

  • Regular cleaning of the communal areas of the building

  • Responsibility for payment of electricity bills for communal areas

  • Clearing rubbish from the property and surrounding land

  • Cleaning and clearing flats of furniture abandoned by previous tenants

  • Assisting an elderly tenant, including dealing with telephone calls and acting as a liaison

Partnership stamp duty relief (Schedule 15)

If you’re running your property business and are married or in a civil partnership, a registered partnership or an LLP, you could be eligible for S15 land and buildings SDLT relief on incorporation of the property.

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