Two changes were announced in the Autumn Statement to the treatment of goodwill on incorporation, which had immediate effect from 3 December 2014.

These were as follows:

  • Entrepreneurs’ Relief is no longer available on a sale of the goodwill to a connected party
  • Tax relief on writing off the goodwill (amortisation) can no longer be obtained once in the company.

Both of these changes will reduce the attractiveness of common planning which was undertaken when incorporating a business, but there are still options available to avoid tax becoming a drawback on incorporation.

The use of TCGA 1992, s.162 incorporation relief, in combination with s.165 gift relief where suitable, is still possible in order to avoid upfront capital gains on incorporation.

It should also be noted that the new restrictions only apply where the parties are connected, and there could therefore be situations where suitable planning could be undertaken to prevent the rules from applying.  Similarly, in cases of a management or third-party buy-out, these new restrictions should not apply.

With further tightening of the rules, it will be more important than ever to ensure suitable professional advice is sought before undertaking an incorporation as careful structuring will be needed to avoid unexpected outcomes.

Ramsay v CRC – A Property Business Can Qualify for Incorporation Relief

Mrs Ramsay appealed against HMRC’s decision to deny her rollover relief under TCGA 1992 s.162 on the transfer of a property into a company – otherwise known as incorporation relief.

HMRC said the gain did not qualify for the relief as the property was not a business when the transfer was made.

The case was initially decided in favour of HMRC at the First-tier Tribunal.  However, the case was subsequently appealed to, and heard by the Upper-tier Tribunal.

Background & Relevant Facts

The taxpayer inherited a one-third share of a block of flats in 1987. She took over the administration for the whole building in 2002 and gifted half of her share to her husband in February the following year.

The couple spent about 20 hours a week attending to the building, making sure the rent was paid on time, cleaning communal areas, forwarding post to tenants who had left, and ensuring the property was insured and complied with fire regulations.

The taxpayer purchased the rest of the building from her brothers, and in September 2004, she and her husband transferred the property to TPQ Developments Ltd in exchange for shares in the company – incorporation relief was claimed. The couple made a gift in August 2005 of all their shares in TPQ to their son, who became the sole shareholder and director of the firm.

The Case

HMRC claimed the incorporation did not qualify for rollover relief under TCGA 1992, s 162 because the property was not a business when the transfer was made. The First-tier Tribunal (FTT) agreed the Revenue’s arguments.

The taxpayer appealed to the Upper-tier Tribunal (UTT).  The UTT found that the FTT’s finding was based on an error of law.

The question which was required to be addressed was a straightforward one; ‘whether the activities of Mrs Ramsay in relation to the Property constituted a business’.

Unfortunately, however, the FTT had concerned itself whether the property activities were sufficient to be taxed as trading income (rather than property income), and whether the property would have attracted business property relief.

The UTT said “business” in the context of s.162 should be interpreted broadly – there was no set test under the legislation.

The judge remarked that the criteria as to what constituted a business in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 were helpful, even though that case concerned VAT.

In this instance, the work carried out by the taxpayer satisfied the tests laid out in Lord Fisher. As to the question of degree, the taxpayer’s activities in respect of the property amounted to a business for the purpose of s.162.

The taxpayer’s appeal was allowed.

In this article on Partnership Tax, we will take a look at some of the latest developments in practical tax matters relating to Partnerships. 

Incorporation of a Business within an LLP

The increased usage of LLPs as business vehicles has raised thoughts over how a business owned by an LLP could be transferred to a company.

Routes for incorporation must be carefully considered and options include transferring the business of the LLP to the company or transfer of the members’ interests to the company.   Generally commentators opinion is that HMRC are indifferent to the structure utilised but the incorporation relief rules regarding CGT must be reviewed thoroughly in the planning phase.

Also solicitors should be consulted to make sure implementation is carried out properly.

Incorporation Relief

Key tests for the relief from capital gains tax include whether a business is being operated and whether the whole business is transferred.

The Tribunal Case of Elizabeth Ramsey looked at whether a property portfolio could be a business.  The Tribunal Judges held that in her case, it wasn’t a business, but there is some doubt as to whether this decision was appropriate.  It isn’t binding given that it was a Tribunal case.

SDLT on Incorporation

It is thought that there could be an interpretation of the current rules where SDLT is avoided on the transfer of a property as part of a business from a partnership to a limited company.  Such an interpretation may be in contravention to HMRC’s view and specific written advice should be obtained.

Certainly conversation to a partnership business from a sole trader and then incorporation could be caught by anti-avoidance rules.

Corporate Partner

Consideration of the introduction of a company into a  partnership of natural persons is still a consideration in terms of allowing a structure that works commercially for a business.

If commercial reasons dictate that a company would be a useful partner then tax savings might be achieved, especially as we are still to have a highest rate of income tax of 45% + 2% NI.

It is important to note that the introduction of a company needs bespoke consideration and could cause difficulties  in terms of partnership succession, unless a careful plan is set out.  There are a number of different options under which a company could interact with a partnership.