In a welcome decision published on 15 May 2013, the Upper Tribunal (UT) have upheld an appeal against the First-tier Tribunal (FTT) decision in Elisabeth Moyne Ramsay TC61871, overturning the disallowance of roll-over relief in relation to a property letting enterprise.
The FTT decision, reported in March 2012, had been a very surprising one, casting doubt on the previously understood position that the active management of property was sufficient to constitute the carrying on of a ‘business’ for the purposes of s162 TCGA 1992 roll-over relief.
In considering the earlier decision, the UT judge was satisfied that the FTT had made an error in law in reaching its conclusion that the activities of Mr and Mrs Ramsay did not amount to a business for the purposes of s162 and that the proper decision was to allow the appeal and set aside the earlier decision.
The UT made some interesting and important points when considering the question of whether a business was carried on, which will be of interest to practitioners advising clients in similar situations.
The Upper Tribunal decision
The property in question, which had been transferred to a newly formed company in exchange for shares, was a large house in Belfast owned by Mr and Mrs Ramsay. The house was divided into flats which were let. Despite the fact that both owners had spent approximately 20 hours per week carrying out various activities linked to the property, including meeting and assisting tenants and repairing and maintaining communal areas, the FTT did not accept that they were carrying on a ‘business’ eligible for relief under s162.
The FTT had agreed with HMRC’s argument that the activities in the main were more akin to those carried out by the owner of a passively held investment. Their starting point in arriving at that conclusion, had been to consider whether the activities taken as a whole amounted to the carrying on of a property business (chargeable under Schedule A) or whether an actual trade was being conducted. The UT believed this was the wrong approach. In its view, the issue was whether the activities constituted a business and whether or not a trade was being conducted was not relevant for the purposes of s162 relief.
The UT underlined this point when commenting on the case law which had been used to support the FTT decision, in particular the reliance on the case of Rashid v Garcia (SpC348), an NIC case where the meaning of business had been closely associated with trades, professions and vocations. The Judge believed that while this might have been applicable for NIC purposes it was not appropriate for s162. The UT was also critical of the use of this case in supporting the qualitative approach taken in respect of activities undertaken and the view that these were not over and above those that might be required in respect of normally let property and that the scale of the activities was simply commensurate with the size of the property and the number of occupied apartments. In the UT’s opinion it is the degree of activity as a whole which is material to the question of whether there is a business, and not the extent of that activity when compared to the number of properties or lettings.
The earlier FTT decision had called into question whether the activities undertaken by Mr and Mrs Ramsay would qualify for business property relief for IHT citing the case of Martin and another (executors of Moore deceased) v IRC  STC (SCD) 5. In that case although HMRC accepted that the deceased activities constituted a business, relief was denied only because the business consisted wholly or mainly of making or holding investments. The UT stated that this test was not present in s162 calling into question the relevance of the case to FTT’s argument.
Business or trade?
One of the key aspects highlighted in this case is the importance of establishing whether, for the purposes of the relief, the activities undertaken constituted a business or whether there was a need for them to support the carrying on of a trade. Some reliefs – e.g. Entrepreneurs’ Relief, ‘s.165’ Holdover relief, ‘s.152’ Roll-over relief, Substantial shareholding exemption – involve a positive ‘trading’ requirement. Inheritance tax business property relief requires that a business is not ‘investment’ and certain forms of trading are also excluded. But for ‘s.162’ roll-over relief in point here, there is no similar requirement.
As this case shows, however, there are wider aspects to consider when establishing whether activities constitute a business.
What constitutes a business for s162 relief?
The judgement made by the UT in this case was that the word “business” in the context of s162 TCGA 1992 is very broad. Based on specific case law the factors applying to the activities undertaken, which the UT believed were of general application to the question of whether a business is carried on, were summarised as whether they…
- Amounted to a serious undertaking or occupation earnestly pursued;
- Were something that was actively pursued with reasonable or recognisable continuity;
- Had a certain amount of substance in terms of turnover;
- Were conducted in a regular manner and on sound business principles;
- Were of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them.
Although in this case the activities themselves could well have been undertaken by someone who was a mere property investor, the UT was satisfied that the degree of activity exceeded what a normal passive investor would carry out and that this represented the existence of a business. It is therefore the degree and regularity of the activities which appears crucial.
To an extent, this decision takes clients and practitioners back to where we started before the FTT decision so some uncertainty as to what extent of activities will be required to constitute a business in each particular case remains. Nevertheless, the case does recognise that where activities do have substance, are carried out on a regular basis and can be distinguished from what a normal property investor would do, the existence of a business, crucial for the eligibility of s162 relief, can be supported.