Incorporation relief is a valuable relief that allows landlords to postpone the capital gains tax bill that may otherwise arise when transferring an unincorporated property business to a limited company.
The relief, which is no longer given automatically and must be claimed, applies where the business is transferred to a company wholly or partly in exchange for shares. To the extent that the gain relates to shares received in exchange, it can be rolled over such that the base cost of the shares is reduced by the gain. The gain does not crystallise until the disposal of the shares.
The relief applies when ‘a person who is not a company transfers to a company a business as a going concern, together with the whole of the assets of the business, or together with the whole of those assets other than cash, and the business is so transferred wholly or partly in exchange for shares issued by the company to the person transferring the business’.
Is there a business?
The relief is only available on the transfer of a business as a going concern.
The legislation does not define ‘business’ for the purpose of the relief, so it takes its everyday meaning. Guidance on HMRC’s interpretation of the phrase can be found in their Capital Gains Manual at CG65715.
It should be noted that the terms ‘business’ and ‘trade’ are not synonymous – ‘business’ is treated as including a trade, but the definition is wider.
The issue of the meaning of the term ‘business’ in relation to incorporation relief was considered in Ramsay v HMRC [2013] UKUT 0226 (TCC) in which Judge Berner set out the following factors which suggest that there is a business:
- Is there a ‘serious undertaking earnestly pursued’ or is there a ‘serious occupation’?
- Is there an occupation or function actively pursued with reasonable or recognisable continuity?
- Is there a certain amount of substance in terms of turnover?
- Are the activities conducted in a regular manner and on sound and recognised business principles?
- Are they of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
An important additional factor is the extent of the activities.
The First Tier Tribunal found against Mrs Ramsay because they considered that the activities that she undertook in relation to her property were ‘normal and incidental to the owning of an investment property’.
The Upper Tribunal found this was the wrong test. Rather, ‘it is the degree of activity as a whole which is material to the question whether there is a business, and not the extent of that activity when compared to the number of properties or lettings’.
Mrs Ramsay worked on the property for about 20 hours per week. This was found by the Upper Tribunal to indicate the carrying on of a business. The relief was therefore available.
Based on this decision, HMRC operate a rule of thumb and will accept that incorporation relief is available where an individual personally spends 20 hours or more a week on undertaking activities that are indicative of a business.
However, the Upper Tribunal recently considered the meaning of ‘business’ in HMRC v GCH Corporation Ltd and others [2026] UKUT 00219 (TCC). Although the decision does not relate to incorporation relief, it provides useful insight into the approach used to decide whether there is a ‘business’.
The decision highlights the importance of the statutory context and, within this context, the role of case law. Here, there was no ‘hours per week test’; rather, the question was determined by reference to wider factors.
Consequently, landlords relying on the ’20 hours per week’ test to support a claim for incorporation relief would be wise to consider the bigger picture and whether, in the statutory context, the degree of activity as a whole supports the conclusion that there is a transfer of a business as a going concern.
