A group of landlords is in a tax limbo over HMRC's '20-hour rule', sparking an open letter urging clarity on incorporation relief. The rule in question centres on the amount of time spent personally managing properties before a landlord can qualify for tax benefits. This has been a contentious issue, with some interpreting it as a strict minimum of 20 hours per week.
The disputed sentence, found in HMRC's Capital Gains Manual (CG65715), suggests that 20 hours or more of personal activity per week is acceptable for incorporation relief. However, the letter argues this has been misinterpreted and should not be the only factor considered. In reality, a property business's overall scale, continuity, commercial organisation, and substance are far more critical indicators.
Incorporation relief allows businesses to transfer their assets as a going concern into a company in exchange for shares. The open letter asserts that current legislation does not specify a minimum number of working hours, nor does it necessitate personal involvement in every activity. Instead, the key consideration is whether the business is being transferred as a genuine entity.
The 20-hour figure originated from an Upper Tribunal case (2013) involving Elisabeth Moyne Ramsay, who managed ten flats with her husband, spending around 20 hours per week on the properties. However, this decision did not establish a minimum requirement for Section 162 relief or imply that all personal activity must be undertaken by one individual.
The open letter argues that UK landlords may miss out on tax benefits and business structuring opportunities if they're deterred from incorporating due to the current interpretation of the 20-hour rule. It advocates for a more holistic assessment, where time spent is just one aspect of evidence, rather than the sole determinant, when evaluating property business activities.