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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Transfer of a business to a company: conditions for relief: meaning of ‘business’

TCGA92/S162 (1) refers to the transfer of a `business’ rather than a `trade’.

`Business’ is not defined for the purposes of TCGA 1992 so the word must be given its normal meaning. It should be treated as including a `trade’ but it also goes wider than that. The terms `business’ and `trade’ are not synonymous.

It is a question of fact whether a particular activity constitutes a business. It is not easy to draw the line, and each case must be judged on its own facts.

The case of American Leaf Blending COSdn Bhd v Director-General of Inland Revenue [1978] 3 All ER 1185 (a Malaysian tax case heard by the Privy Council) is useful authority for what is meant by `business’ and highlights the fact that what may constitute a business if carried on by a company may not be a business if carried on by a private individual.

The meaning of ‘business’ in the context of incorporation relief was considered by the Upper Tribunal in the case of Ramsay v HMRC [2013] UKUT 0226 (TCC). That decision confirms that where the Courts have considered the words elsewhere the particular context of the legislation involved often restricted the meaning.  The First Tier Tribunal had misdirected itself by relying too much on such cases.

In his decision, Judge Berner set out the relevant factors to establishing whether if an individual is carrying on a ‘business’ for the purpose of incorporation relief:

Firstly, there are the factors that point to the activities involved being broadly what you would expect in a business:

  • Is there a “serious undertaking earnestly pursued” or 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 by them

An important additional factor is the extent of the activities.  The First Tier Tribunal found against Mrs Ramsay partly because it considered that the activities she undertook in relation to her property were “normal and incidental to the owning of an investment property”. That was not the correct test in this context:

‘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 was found to have worked on the property for about 20 hours per week which was found to be sufficient to indicate the carrying on a business.

You should accept that incorporation relief will be available where an individual spends 20 hours or more a week personally undertaking the sort of activities that are indicative of a business.  Other cases should be considered carefully.