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  • Tax

    Incorporation - piece of missing information?

    I was told something about incorporation this week that I was not aware of, and wanted to see if the tribe concur.

    If you put your properties into a limited company structure, you will have to be able to prove to HMRC that you are "actively managing" the properties and are involved in that process on a regular basis.

    This means travelling to the properties, checking tenants in and out, undertaking inventories etc.

    This would surely typically mean someone who operates full time in property, not someone with a full time job?

    What does this mean for landlords who have a fully managed service who are not hands on?  Do they qualify to incorporate their properties? 

    Or have I misunderstood something or got the wrong end of the stick?

    Perhaps this is the reason why people keep saying "professional" landlords are likely to survive - because they can reduce the effects of C24 through ltd. co. while amateur landlords could not meet the criteria?

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    Hiring someone to do the work should count, but you should probably speak to a professional.

    For property businesses the issue is most likely to be whether you qualify for incorporation relief when you change to a company structure.

    AIUI For this particular part of the tax law there is no statutory deinition of what a business is. HMRC used to argue that property letting is an investment activity not a business. However they were taken to court over this and there was a ruling in 2013. So they have changed their guidance and it now says " for there to be a business for incorporation relief there has to be “activity” and that just a modest degree of activity would not suffice. It also shows us that it is the quantity not the quality of the activity that is important.’ " In the case in question the quantity was 20 hours a week, but that does not mean that less might not qualify.

    See https://www.taxjournal.com/tj/articles/in...s-10062015 for more information.

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    Pretty outrageous tor HMRC to suggest a business is one where 20 hours of significant activity occurs.

    Who are HMRC to determine that so many hours work means something is a business

    Sucessful LL might spend 4 hrs a month

    It is still a business.

    No business is necessarily successful because of hours taken up by relevant business activity.

    I would suggest using forums to keep abreast of PRS is a vital part of operating a business

    Some of us spend more time than we should on PT etc.

    That has to be counted as business activity!!

    Call it CPD

    LL have to WORK at keeping up to date with PRS requirements!!

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    The Ramsay case - on which people are basing this "20 hours" notion was decided by a judge (Judge Roger Berner)

    In fact the "20 hours" notion is a misleading simplification of his ruling.

    His judgement does not state any arbitrary hours worked figure, but, after considerable reference to numerous previous cases that considered similar matters

    "64. As I have described it earlier, in my judgment the word “business” in the context of s 162 TCGA should be afforded a broad meaning. Regard should be had to the factors referred to in Lord Fisher, which in my view (with the exception of the specific references to taxable supplies, which are relevant to VAT) are of general application to the question whether the circumstances describe a business. Thus, it falls to be considered whether Mrs Ramsay’s activities were a “serious undertaking earnestly pursued” or a “serious occupation”, whether the activity was an occupation or function actively pursued with reasonable or recognisable continuity, whether the activity had a certain amount of substance in terms of turnover, whether the activity was conducted in a regular manner and on sound and recognised business principles, and whether the activities were of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them. "

    You can, if so inclined, read the entire judgment here

    https://www.tribunals.gov.uk/financeandta...v_HMRC.pdf

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    You are correct that there isn't a definitive guideline in terms of hours Vanessa.

    It gets more 'interesting' when it is considered in the context of one of the cases referenced in the Ramsay judgment, Rashid v Garcia (SPC 000348, 11 Dec 2002).  Rashid was claiming to be eligible to pay Class 2 NI contributions by virtue of being self employed due to the work he did on his property portfolio.  He estimated that he (and his family) spent 18 - 28 hours per week conducting exactly the type of work that Ramsay put forward as that involved in managing her property.

    The Special Commissioner ruled that there was not enough activity to constitute a business and "that the property holding was an investment which by its nature required some activity to maintain it, rather than a business"

    However, as Judge Berner concluded, his is a subjective judgment on Ramsay's case in particular.

    "67. Applying these principles, in this case I am satisfied that the activity undertaken in respect of the Property, again taken overall, was sufficient in nature and extent to amount to a business for the purpose of s 162 TCGA. Although each of the activities could equally well have been undertaken by someone who was a mere property investor, 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. I find that was the case here."

    It follows, perhaps, that relying on the Ramsay case to achieve the same ends (incorporation relief) requires one to demonstrate that she is doing at least as much (and with similar structure, rigour, process and financial results) as Ramsay did.  That isn't something that is measured only in hours worked.

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    I am confused by the OP's post:

    "If you put your properties into a limited company structure, you will have to be able to prove to HMRC that you are "actively managing" the properties and are involved in that process on a regular basis." - OR WHAT?

    Are you saying you cannot incorporate or are you saying you cant claim interest relief?  Is this to do with transferiing exisitng proeprties into a LTD company?

    There may be issues with respect to NI, Incorporation reliefs etc.. but in terms of actually incorporating and then claiming interest as a deduction does not require any other conditions to my knowledge.



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    I took it that to run property investment through a ltd co. you needed to prove that you were activley involved in the business, not a passive participant.

    Therefore HMRC might want to see evidence of your involvement in order to go down the incorporated route.

    This does make sense in the context of HMRC saying that small landlords are not a business in their eyes, hence Section 24.

    I am not saying this view is correct, just that it makes sense that they want to create a distininction between small landlords and those operating as a business.

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    drdes is wholly correct: there is no limit to the size of the portfolio or the involvement of the Directors / shareholders in the management of the properties to be owned by the Ltd co

    Of course, the Directors must fully discharge their obligations as Directors, but that does not need to include any involvement in 'landlord' activities

    drdes is also correct that, in order to claim "incorporation relief" - which is roll over relief of capital gains tax in accordance with S.162 of the Taxation of Chargeable Gains Act 1992 and, therefore, not be liable for CGT when a property portfolio is incorporated into a limited company, there is a requirement to demonstrate that it is a business which is being incorporated, rather than an investment.

    To demonstrate that a property portfolio is a business, rather than an investment, is where the need to demonstrate 'activity' arises.

    If you fail to demonstrate that a business is being incorporated, rather than an investment, then eligibility for the CGT relief is unlikely to be achieved.  That could lead to a CGT bill.

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    Just to confuse things, HMRC are not "saying that small landlords are not a business in their eyes". They say that sometimes they are and sometimes they are not. That is not HMRCs fault. Some bits of the tax law have a definition for "business". Others do not and use the english meaning as interpreted by the courts.

    You can incorporate without significant involvement. I've done it for buying new properties.

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