Nick Wright explores the critical 'business' requirement for tax-efficient property portfolio incorporation, examining when rental activities qualify as genuine business rather than passive investment.
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The ability to transfer a property portfolio to a company in a tax-efficient manner hinges on whether the activities constitute a 'business' rather than mere investment activity.
This is important for capital gains tax (CGT) purposes as incorporation relief requires the transfer of a ‘business’. A business is also a fundamental principle in establishing a partnership for the purpose of partnership law. Provided a partnership exists, stamp duty land tax (SDLT) may be mitigated as a result of the ‘sum of lower proportions’ calculation.
Throughout this article SDLT is referred to, however, the principles apply equally to both Land and Buildings Transaction Tax (Scotland) and Land Transaction Tax (Wales) unless otherwise stated. The relevant legislation is:
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Scotland - Land and Buildings Transaction Tax (Scotland) Act 2013, Schedule 17
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Wales - Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Act 2017, Schedule 7
Without a genuine business, transferring properties to a limited company is likely to incur both SDLT and CGT. This potentially makes the costs of incorporation prohibitive, regardless of the potential income tax or estate planning advantages.
Incorporation relief
TCGA 1992, s 162 provides a form of rollover relief where ‘a person who is not a company transfers to a company a business as a going concern, together with the whole assets of the business, in return for the issue of shares’.
The relief does not currently need to be claimed, and it is automatic where the conditions are satisfied. However, it was announced at the Autumn 2025 Budget that, from 6 April 2026, a formal claim for relief will need to be made, and the intention is to repeal TCGA 1992, s 162A, which allows for the relief to be disclaimed (as it will no longer be necessary).
The relief requires the following elements:
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a transfer of a business;
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the business to be operated as a going concern;
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all assets to be transferred; and
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shares to be issued to the owners as consideration.
However, the legislation conspicuously lacks any definition of 'business' for CGT purposes. This absence has led to a number of tax cases to assist in understanding the UK courts’ interpretation.
Sum of lower proportions
On first principles, properties transferred to a connected company will incur SDLT based on the market value of the properties.
However, when a partnership transfers a property portfolio, FA 2003, Sch 15 provides that the method of calculating the SDLT follows the sum of lower proportions. Broadly speaking, if the ownership proportions in the partnership are the same as the ownership proportions of the shares of the company, in most cases, the SDLT charge is reduced to nil.
Partnership Act 1890, s 1 defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view of profit’.
Thus, the requirement for a business to exist is crucial to determining the existence of a partnership. It is also noteworthy that, regardless of whether partnership accounts or tax returns are filed, the above definition is the crucial point for SDLT purposes.
The business versus investment distinction
Clearly, the term 'business' encompasses more than mere 'trade'. Whilst a trade will always constitute a business, a business will not always be a trade. This distinction becomes particularly relevant for property investors, as rental activities typically fall short of trading status but may nonetheless qualify as business activities.
In practice, the dividing line between business and investment activities remains a grey area.
The case Elizabeth Moyne Ramsay v HMRC [2013] UKUT 0226 (TCC) is perhaps the most well-known case on the topic of property incorporation. Mrs Ramsay owned a large house divided into ten flats, which she let to tenants whilst undertaking substantial management activities.
Her activities included meeting tenants, paying electricity bills for communal areas, changing insurance policy details, unblocking drains, garage maintenance, clearing debris, returning post, ensuring fire regulation compliance, and installing fire extinguishers. Additionally, she had developed refurbishment and redevelopment plans for the property.
Initially, the First-tier Tribunal (FTT) dismissed her incorporation relief claim. It held that these activities were "normal and incidental to the owning of an investment property" and that "the scale of activities simply were commensurate with that size of property and the number of occupied apartments".
However, the Upper Tribunal (UT) reversed this decision, holding that the FTT had addressed the wrong question. Rather than asking whether the activities were normal for property ownership, the correct test was "whether the taxpayer's activities in relation to the property constituted a business". Crucially, the UT concluded that Mrs Ramsay's level of activity (approximately 20 hours per week) was sufficient to amount to a business.
Following the Ramsay decision, HMRC published guidance in its Capital Gains Manual at CG65715 acknowledging the results of this case. HMRC now accepts that incorporation relief will be available where an individual spends 20 hours or more per week personally undertaking activities indicative of a business.
What is interesting about HMRC’s guidance is that it states that officers “should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business”.
However, HMRC also states that “other cases should be considered carefully”. In other words, working less than 20 hours a week may still be sufficient to justify a business, depending on the facts of the case.
Importantly, HMRC clarifies that time spent by third-party management agents does not count towards the required hours. Thus, portfolios of significant sizes may not constitute a business without the appropriate level of activity from the taxpayer.
Further cases that help us understand what a ‘business’ is include Lord Fisher v CEC [1981] STC 238, which was, in fact, a VAT case that established six factors to consider:
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whether the activity is a "serious undertaking earnestly pursued";
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whether it involves "occupation or function actively pursued with reasonable or recognisable continuity";
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whether it has "a certain measure of substance as measured by quarterly or annual value of taxable supplies";
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whether it is "conducted in a regular manner and on sound and recognised business principles";
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whether it is "predominantly concerned with making taxable supplies to consumers for a consideration"; and
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whether the supplies are "of a kind commonly made by those who seek to profit by them".
These criteria provide useful benchmarks, though their application to property portfolios requires careful consideration of specific circumstances.
Wakefield College v RCC [2018] EWCA Civ 952 is a more recent case that now requires us to consider a two-stage test. The first stage is that the activity must result in the supply of goods or services for consideration. In other words, there must be a link between the payment and the goods or services supplied. However, whilst this is a necessary component, this factor alone is not sufficient to establish a business.
In the context of property rentals, this stage is almost certainly going to be achieved.
The second stage is that we need to consider whether the supply is made for the purpose of obtaining income (or remuneration).
This is where we are left with something of an unsatisfactory analysis. The court believed that there was no “checklist of factors to work through”; instead, each business must be considered based on its own merits.
It is worth noting that, irrespective of the two-stage test resulting from Wakefield College, HMRC guidance (see CG65715) continues to list similar tests to the six factors established in Lord Fisher as indicative of the requirements of the second stage.
Where does this leave us?
The Ramsay decision establishes that substantial personal involvement is necessary to establish business status. However, practitioners should exercise caution in applying this precedent. The decision turned on Mrs Ramsay's specific facts: a ten-flat property requiring approximately 20 hours weekly management, with significant hands-on involvement and future development plans.
For incorporation relief claims and to establish the existence of a partnership for SDLT purposes, taxpayers should keep robust records and comprehensive documentation to demonstrate that sufficient activity is being undertaken to justify a business rather than passive investment activity.
Despite the precedent established in the Elizabeth Moyne Ramsay case, significant uncertainty still exists given the open-ended nature of the Lord Fisher and Wakefield College tests.
The absence of statutory clearance facilities means taxpayers must often rely on advisers to consider the specific facts of their case and reach a reasoned conclusion. However, this uncertainty creates a significant practical issue in that if HMRC successfully challenges the existence of a business, incorporation relief would be denied and the full portfolio transferred, subject to CGT based on the market value at the date of transfer.
If the business requirement was also relied upon to establish the existence of a partnership, SDLT would also fall due, again based on the market value at the time of transfer.
It is also noteworthy that there are numerous artificial arrangements designed solely to create business status that risk HMRC challenge under anti-avoidance provisions. Indeed, one such arrangement was highlighted by HMRC in Spotlight 63 (www.gov.uk/guidance/property-business-arrangements-involving-hybrid-partnerships-spotlight-63).
Practical tip
Given the uncertainty surrounding what constitutes a business for incorporation and SDLT purposes, advisers should encourage clients to proactively document their activity long before any restructuring is contemplated. In practice, this means keeping a simple but consistent record of:
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weekly time spent on management and operational tasks (including specific activities undertaken);
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maintenance logs, contractor instructions, and oversight notes showing ongoing involvement rather than passive ownership;
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tenant communications that evidence hands-on management;
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planning, refurbishment or redevelopment works demonstrating strategic engagement with the portfolio; and
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financial and operational decisions, such as rent reviews, capital expenditure budgeting, and supplier negotiations.
This evidence can make the difference between HMRC accepting the existence of a genuine business, or denying incorporation relief and SDLT mitigation entirely. When business owners understand that a simple activity log may safeguard them from a significant tax exposure, compliance becomes far easier.
