A major Upper Tribunal decision is throwing into doubt HMRC's long-standing guidance on incorporation relief for landlords, sparking concerns that the rule has been misinterpreted. The case in question - GCH Corporation Ltd and others versus HMRC - highlights the arbitrary nature of relying solely on the number of hours a landlord dedicates to managing their properties.
HMRC's Capital Gains Manual advises that incorporation relief is generally available where an individual spends "20 hours or more a week" managing their properties. This guideline has become a crucial benchmark for landlords and their advisers considering transferring their property businesses into a limited company, often made to mitigate tax liabilities following changes to mortgage interest relief.
However, experts suggest this focus on a specific hourly commitment may not reflect Parliament's original intent. The underlying legislation does not specify an hourly threshold but rather refers to the existence of a 'business'. In GCH Corporation, the Tribunal interpreted the statutory word 'Business' in the context of the company's overall activities, not individual hours.
The precedent often cited for the 20-hour figure is Elisabeth Moyne Ramsay v HMRC. In this case, Mrs Ramsay spent around twenty hours weekly on her portfolio and was deemed to be carrying on a business. HMRC has reflected these facts in its guidance but critics argue that over time, it has become the legal test itself, rather than an interpretation of one specific case.
The GCH Corporation ruling may now prompt a more holistic assessment of a landlord's operations when considering incorporation relief. The implications for landlords and their advisers are significant, as they re-evaluate the accuracy of HMRC guidance in light of this precedent-setting decision.