Should a property letting business be run by individuals who wish to transfer the property into a limited company then there will be a CGT charge on the transfer at market value.

The CGT charge can be wholly or partly postponed by use of an ‘incorporation relief’ (‘hold-over’) claim where the exchange is wholly or partly for shares in the company.

The charge is deferred until the person transferring the business disposes of the company shares. The ‘held-over’ gain is subsequently deducted from the cost of the shares resulting in an increased charge when the shares are eventually sold. The business being transferred must be ‘as a going concern’. Should the exchange be for part shares then the CGT is partly deferred.

One of the difficulties in succeeding in a claim for ‘incorporation relief’ is in actually determining whether there is a qualifying business in place because the relief is not normally available on investment property businesses.

Example:
The recent tax case of Ramsay v HMRC (2013) shows how difficult it is to succeed with this claim. The taxpayer was the landlord of a large property which had been converted into ten flats, five of which were occupied by tenants. The property was transferred to a company, in exchange for shares in that company under an ‘incorporation relief’ claim.

HMRC initially disallowed the claim arguing that letting is an investment activity and as such there was no ‘qualifying business’ – the taxpayer appealed and the court allowed the claim, the reason being that the activities performed in the letting were over and above those which were incidental to the owning of an investment property.