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Peter Vaines of Squire Sanders reports on the first claim for Incorporation Relief for a property letting business to be heard by a tax tribunal.

There has been considerable uncertainty about whether the transfer of a property letting business to a company in exchange for shares, qualifies for relief from Capital Gains Tax under TCGA 1992 s 162.

TCGA 1992 s 162 provides a relief from Capital Gains Tax on the incorporation of a business. The idea is engagingly simple. If you transfer your business including all its assets (other than cash) to a company in exchange for an issue of shares, any gains arising on the business assets by reason of the transfer are effectively rolled into the shares. There are a number of interesting (and valuable) side effects to this relief.

To benefit from the relief you have to be carrying on a business. Income from property lettings is described as a business for Income Tax. It used to fall within TA 1988 s 15 which said:

"Tax is charged under this Schedule on the annual profits arising from a business carried on for the exploitation as a source of rent or other receipts, of any estate interest or rights in or over land in the UK. To the extent that any transaction is entered into for the exploitation, as a source of rents or other receipts of any estate interest or rights in or over land in the UK, it is taken to be entered into the course of such a business."

Now the matter is covered by Part 3 of ITTOIA 2005 which uses similar wording.

So it is clear that property letting and the receipt of rents is a business - at least for Income Tax purposes. However, Section 162 is a capital gains tax relief and subject to completely separate legislation. The question therefore arises whether property lettings are a business for Capital Gains Tax purposes as well. The point was recently considered by the Tribunal in the case of Elizabeth Moyne Ramsay v HMRC TC 1871.

In this case the taxpayer had a house which she developed and converted into 10 flats from which she derived rents. The taxpayer said that she provided lots of services which represented a business; HMRC said the services were consistent with looking after an investment property and was not a business. The Tribunal looked at the various authorities about what represented a business and decided that on balance the activities carried out by the taxpayer were merely incidental to the ownership of the investment property and did not represent a business.

Not all together surprising perhaps. It was arguable of course but in the end it was a question of fact on the day and not really noteworthy apart from it being the first case on the application of TCGA 1992 s 162 to property letting.

However, the curious part of the judgment was how the Tribunal set out the various arguments and the law. Naturally they reproduced the terms of Section 162 and they also set out the terms of Section 15 which applied at the time. However, having done so, they did not refer to Section 15 again. This was odd because if Section 15 was relevant - and if not, why did they specifically set out its terms under the discussion of the relevant law - then one might reasonably conclude that if a property letting business is a business for income tax purposes, it might also be a business for Capital Gains Tax purposes. There may be good reasons why not - but none were mentioned.