Property Incorporation Relief – Handling HMRC Enquiries
Posted on 28 Nov 2023, by Jeremy Johnson
HMRC has started to write to individuals who incorporated property portfolios in 2017/18, in a so called ‘One to Many’, or ‘Nudge’ campaign. A copy of the letter can be found on the Chartered Institute of Taxation (CIOT) website, as per the link at the bottom of this article.
We assume that HMRC is writing in relation to 2017/18 initially, because its ‘discovery’ window to issue assessments (assuming careless behaviour) to individuals will close on 5 April 2024.
HMRC’s letter asks for people to consider whether incorporation relief was correctly applied and, if not, to make a disclosure. Somewhat problematic is that HMRC states in its letter that, if you believe that your claim was correct, you need to state as such within 30 days, provide details of the calculation and explain any consideration you received that was not shares. If you don’t provide sufficient explanation, HMRC states it may then issue a discovery assessment, presumably denying some or all of the incorporation relief.
HMRC mentions three areas that should be checked. These are:
1. whether the gain arising was greater than the value of the property business
2. whether the value of the gain exceeded the value of shares issued
3. whether something other than shares was given in consideration
HMRC’s nudge letter mentions a sum credited to a director’s loan account in relation to the third point above. A credit to the director’s loan account, deriving from a loan that is only in place for a day, is often a feature of the Property118 arrangements that have been mentioned in the mainstream and tax press.
HMRC continues to focus on landlords and property issues, its let property campaign has now been running for years which has targeted those who have received income from rental properties which has not been declared, and/or capital gains due on property disposals. Recently, scrutiny has turned to property incorporation arrangements, as well as the more common issues.
Property incorporation is not in and of itself a problem, but the issues were with some arrangements that promised advantageous tax results which were too good to be true. Often property incorporation was sought because of Section 24 interest relief restriction, but sometimes the promise of inheritance tax benefits, or a rebasing of value for capital gains purposes was given.
We’re helping many clients who used property incorporation schemes to assess whether they now have an historical or ongoing tax problem, and if so, how it can be fixed. If you have received a letter from HMRC in relation to property incorporation relief, or any property tax related matter, and need to understand your options, please do get in touch.