CGT-free property transfers

Buy-to-Let

The Upper Tribunal has chipped into the argument on whether property rental counts as a business or an investment. Why might its decision be an important one for landlords looking to reduce their tax bills?

What was at stake?

The case of Mrs Ramsay (R) and HMRC centred on one simple question. Whether or not a personally owned rental property counted as a business or an investment for capital gains tax (CGT) purposes. If it was a business the transfer of the property into her company wouldn’t trigger a CGT charge (see below), but if it were an investment it would.

Why make the transfer?

Rental income profits in a company are charged to corporation tax at a maximum of 23% instead of income tax rates of up to 45% for personal ownership. Plus, where a property is sold by a company an indexation deduction is given to reduce any taxable gain it makes on the sale. Individuals selling a property can’t claim indexation. R’s plan to take advantage of these tax breaks would be worth less if CGT had to be paid on the transfer of the property.

Deferring the tax on transfer

R was aware that transferring an asset to a company as a gift is treated as a sale at the going price. Normally HMRC taxes this notional capital gain. However, a special rule says the gain is automatically and indefinitely deferred from being taxed where the asset is a business rather than an investment.

Special rule didn’t apply

Generally, a rented property is seen as an asset. However, where it’s furnished holiday accommodation special rules say it can be treated as a business and therefore CGT deferral can apply. But R’s property was a block of ten flats let out as homes.

Other judgments

The case was first heard by the Lower Tribunal which relied on previous judgments in arriving at its decision. It thought the key factor in deciding whether rental income is a business is the nature and type of extra services a landlord provides, e.g. repairs, redecoration, etc. In its view R didn’t provide nearly enough of these to make her property rental count as a business.

The wrong test applied

The Upper Tribunal judge took a different view. It said that the scale of operations was the proper test. To a layman the many tasks R undertook simply to keep and manage the property so it was fit to let would seem like a business. And because there’s no special definition of “business” for CGT holdover (deferral) relief the everyday meaning is what matters. The judge ruled in favour of R.
Trap. This ruling might be challenged by HMRC, therefore we wouldn’t recommend relying on it. Even if it stands it’s unlikely to apply to landlords owning a single property.
Tip. For landlords whose rental income doesn’t count as a business it’s still possible to transfer their properties into a company piecemeal and avoid CGT that way.