Nick Wright explains why incorporating a property portfolio triggers two costly tax charges, capital gains tax and stamp duty, and why Ramsay v HMRC leaves the business test genuinely uncertain for many landlords.
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For the landlord already holding personally who concludes that a company is the right vehicle, incorporation is the mechanism and it is dominated by two tax costs, capital gains tax (CGT) on the transfer and stamp duty on the acquisition. Managing both is the whole of the exercise.
The CGT charge arises because the transfer to a company controlled by the transferor is a disposal at market value between connected persons.
The first question is therefore whether there is a gain on the properties? Assuming there is and the CGT charge would be material, the second question is whether incorporation relief under TCGA 1992, s 162 is available. Incorporation relief defers the gain by rolling it into the base cost of the shares received, and – because it turns on the transfer of a business rather than a trade – it is a relief on which an active landlord may depend. Its availability is the point at which the business test of Section 2.1 becomes decisive, and it is genuinely uncertain in many cases.
Elizabeth Moyne Ramsay v HMRC [2013] UKUT 226 (TCC)
Facts
The taxpayer transferred to a company a converted property divided into ten flats which she let to tenants. She carried out the management herself – dealing with tenants, maintaining the common parts, arranging insurance, attending to repairs, etc. – spending around 20 hours a week on the property. HMRC refused incorporation relief on the basis that holding and letting the property was an investment activity rather than a business.
Held
The Upper Tribunal allowed the relief. The First–tier Tribunal had asked the wrong question – whether the activities went beyond what was normal for property ownership – when it should have asked simply whether what the taxpayer did amounted to a business. Judged on that test, the degree and seriousness of her activity meant that it did.
Relevance
Ramsay establishes that a property letting activity can be a business for incorporation relief, and so can qualify under s 162. But it turned on a substantial level of personal involvement, and HMRC treats it as setting a high bar: its guidance accepts a business where the owner spends 20 hours or more a week personally on activities indicative of a business, while reserving the right to examine other cases on their facts. Time spent by a managing agent does not count towards that involvement.
The practical consequence of Ramsay is uncertainty, which can be extremely costly. If HMRC successfully denies that a business existed, incorporation relief falls away and the whole gain is chargeable at market value, with no cash from a sale to fund it. Furthermore, there is no advance clearance for incorporation relief. As a result, it becomes crucial to support any analysis of the landlord’s activity with documentary evidence.
A further issue concerns mortgages. The assumption of business liabilities by the company would, strictly, be non-share consideration that restricts the relief, and although Extra-Statutory Concession D32 prevents that where the debt is genuinely taken over, most (but not all) lenders will not novate a loan and instead grant a replacement loan to the company, the treatment of which under the concession remains contested and is the subject of professional representations to HMRC.
From 6 April 2026, incorporation relief must be claimed in the transferor's self-assessment tax return and is no longer given automatically; the election to disapply it under s 162A has been repealed as it is unnecessary. This, alongside Spotlight 63 in 2024 and Spotlight 63a in April 2026, clearly shows the level of HMRC scrutiny in this area. The requirement for a formal claim and not automatic relief means HMRC has greater visibility of property incorporations.
A landlord who wishes to crystallise some or all of the gain deliberately – for example by taking part of the consideration as a director's loan account to draw down tax-free later, or to use capital losses – can do so by determining the combination of director’s loan account and share consideration, given s 162 only requires the consideration for the property portfolio transfer to be ‘wholly or partly in exchange for shares’. Crystallising a gain at 24% now (or using capital losses, annual exemptions or even EIS reinvestment reliefs), to create a loan account that can be repaid without further tax, can compare favourably with leaving the value to be extracted later as dividends taxed at up to 39.35%.
The stamp tax charge is the second cost, and it is the connected company market value rule that makes it unavoidable on a transfer to one's own company. For a property portfolio in sole ownership there is no exception under SDLT or LBTT or LTT and a charge will be incurred, even if incorporation relief is available to defer the CGT.
For partnerships, the relief that matters is the partnership treatment in FA 2003, Sch 15 (or LBTT(S)A 2013, Sch 17 and LTTA 2017, Sch 7 in Scotland and Wales respectively), which can reduce the charge to nil where a genuine partnership incorporates – subject to the evidential difficulties in Section 3.2 and the anti-avoidance rule in s 75A. Where there is no partnership, the charge falls due on the market value, at residential rates with the 5% surcharge (and the 17% rate for individual dwellings over £500,000 unless the letting relief applies), or at commercial rates capped at 5%. The rule treating a transfer of six or more dwellings as non-residential (FA 2003, s 116(7)) can substantially reduce the charge on a larger residential portfolio and should always be considered; multiple dwellings relief, by contrast, was abolished for SDLT in June 2024 and is no longer available. The position in Scotland and Wales follows the same architecture under the LBTT and LTT legislation, but with the harsher additional dwelling rates noted in Section 2.6.
The ‘so what’ of this section is straightforward. The structure should follow the objective: do not incorporate a portfolio that is about to be sold, and do not leave in personal ownership a portfolio whose purpose is to be grown and handed down. Where incorporation is the answer, its viability turns on two questions that must be settled before anything moves – is there a business for s 162, and is there a partnership for the sum of lower proportions – and the evidence for both must be clear and documented well in advance of the transaction.
Practical point:
There is no advance clearance for s 162 – where the business test is borderline, price the downside (the whole gain taxed now, with no sale proceeds to pay it) before the client commits.
