Property Letting a Business for Rollover Relief, Rules Tribunal

Capital Gains Tax ‘rollover relief’ allows a capital gain made on the realisation of a business asset to be postponed if the proceeds of sale of the asset on which the gain was made are reinvested in qualifying assets (normally business assets).

The Upper Tribunal (UT) recently heard an appeal involving a claim for rollover relief. It dealt with a gain made by a woman who transferred her business as a going concern in exchange for shares in a company.

HM Revenue and Customs (HMRC) argued that her business was not a qualifying business because it was a property letting business – a house divided into ten flats.

In connection with the flats, the taxpayer and her husband paid utilities and insurance bills, took responsibility for compliance with health and safety regulations, and undertook the maintenance of the property, gardening, administration, cleaning of the communal areas and other small jobs.

It was not disputed that these activities took the woman and her husband about 20 hours per week each. According to the First-tier Tribunal (FTT), the question in dispute was whether their activities were ‘sufficient to distinguish the property letting business carried out by her from a normal Schedule A taxable concern’.

The FTT concluded that this test was not satisfied and rollover relief was not available. The taxpayer appealed.

In the UT’s view, the significant issue was not the question of how the income was taxed but whether ‘the activity undertaken in respect of the Property, again taken overall, was sufficient in nature and extent to amount to a business...’. The judge concluded that ‘although each of the activities could equally well have been undertaken by someone who was a mere property investor, where the degree of activity outweighs what might normally be expected to be carried out by a mere passive investor, even a diligent and conscientious one, that will in my judgment amount to a business’.

The hurdle seemingly set by the UT to justify a property letting business being a ‘business’ for the purposes of claiming rollover relief is a low one and a further appeal by HMRC is likely. However, at present the decision will be welcomed by those earning a living from tenanted property.