Section 162 Incorporation Relief for UK Landlords Explained

What Section 162 incorporation relief does

Section 162 TCGA 1992 provides for the deferral of CGT when an individual transfers a business — including all the business's assets — to a limited company in exchange for shares.

Without Section 162: transferring £1M of property to your own Ltd company is treated as a £1M sale at market value, triggering CGT on the gain (e.g. £500k gain × 24% = £120,000 CGT).

With Section 162: the CGT is deferred by rolling the gain into the cost basis of the shares you receive in exchange. You pay no CGT at the point of incorporation, but when you eventually sell the shares (or wind up the company), the deferred gain crystallises and CGT applies then.

The relief is automatic — it applies if the transfer meets the qualifying conditions, with no election required. But the property activity must qualify as a "business" first.

The 'business' test — the Ramsay case

The single biggest hurdle for Section 162 is the "business" test. HMRC distinguishes between:

• Property investment — passive ownership, occasional management. Doesn't qualify as a business for Section 162.
• Property business — active, regular, time-intensive management. Qualifies.

The leading case is Elizabeth Moyne Ramsay v HMRC (2013 UKUT 226), which considered what level of activity constitutes a property "business". The Upper Tribunal accepted Ramsay's claim based on:

• 20+ hours per week spent on property management activities
• A portfolio of multiple properties (10+ flats in her case)
• Active hands-on involvement (showing properties, managing repairs, tenant referencing, rent collection)
• Records showing regular time commitment
• No alternative full-time employment that would preclude this time commitment

The 20 hours/week threshold is a useful rule of thumb but not a hard rule. HMRC and tribunals look at:

• Time commitment (logged hours, calendar entries)
• Portfolio size (typically 5+ properties)
• Active management (not just collecting rent via an agent)
• Regular repairs and renovations managed personally
• Lack of alternative employment that would preclude the time

Property owners who use full-service letting agents and rarely visit their properties almost certainly fail the test. Owners who self-manage actively, especially with HMOs / short-term lets / refurbishment work, often pass.

How Section 162 works mechanically

The qualifying conditions for Section 162 relief:

1. The individual transfers a business (including all its assets, except cash) to a Ltd company.
2. The transfer is wholly or partly in exchange for shares in the receiving company. (Cash consideration partially disqualifies the relief.)
3. The transfer is an arm's-length transfer at market value.

The CGT calculation:

• Identify the gain on each property (market value at transfer minus acquisition cost minus capital improvements).
• Sum the gains to get the total gain on the business.
• The total gain is "rolled over" into the cost basis of the shares received.

Worked example: portfolio of 8 BTL properties, total market value £2,000,000, total accumulated gain £800,000.

• Without Section 162: £800k gain × 24% CGT = £192,000 CGT due now.
• With Section 162: £0 CGT now. New SPV issues you 100,000 shares with cost basis £1,200,000 (i.e. market value £2,000,000 less the deferred gain of £800,000). When you eventually sell the shares for £2.5M (say, 10 years later), the share gain is £2.5M - £1.2M = £1.3M (rather than £500k that you'd otherwise have).

Section 162 doesn't reduce the eventual CGT — it defers it. The deferral is valuable for cash-flow purposes (the £192k stays in your portfolio) and gives you decades to plan the eventual extraction.

What Section 162 does NOT relieve

Important: Section 162 relief covers CGT only. Three other taxes still apply:

• SDLT. The Ltd company is "buying" the properties from you. Full SDLT applies, including the 5% additional-property surcharge. For a £2M portfolio: ~£140,000+ of SDLT. This is usually the biggest single cost of incorporation.
• VAT. Residential rental is VAT-exempt so this is rarely an issue, but commercial property may be opted to tax and trigger VAT on transfer.
• Stamp duty on share allotment (different from SDLT) — minor, typically £5-£10.

The SDLT is often the deal-killer. A £2M portfolio with £140k of SDLT due on incorporation may not be worth doing even with £192k of CGT saved — net benefit £52k vs the substantial admin overhead. Specialist accountant modelling is essential.

Note: there's a narrow exemption from SDLT in some partnership-to-company transfers (Section 75 FA 2003), but it doesn't normally apply to sole-trader landlord incorporations. Specialist tax advice required if you're considering exploiting this.

The SDLT problem and how to manage it

SDLT on incorporation is typically 7-12% of the portfolio's market value (standard residential bands + 5% additional-property surcharge). For most landlords this exceeds the CGT saved.

Practical responses:

1. Don't incorporate the existing portfolio. Leave existing properties personal; buy future properties through a new SPV from day one. This is the standard advice for most established landlords.
2. Partial incorporation. Move only the highest-gain properties (where CGT saved is largest relative to SDLT cost). Leave low-gain or low-value properties personal.
3. Wait for low-gain moments. If you incorporate during a property-value dip, both CGT and the SDLT base are lower.
4. Section 75 FA 2003 partnership-to-company route. If your portfolio is genuinely run as a partnership (e.g. with your spouse, with formal partnership agreement and partnership tax returns for 2+ years), the transfer from partnership to Ltd may qualify for SDLT group relief. The execution is technical — needs specialist advice and well-documented partnership history.

For most landlords, the answer is option 1: don't incorporate existing properties; start the Ltd company route for future acquisitions. The SDLT cost of full incorporation rarely justifies the CGT deferral except for very specific cases (large active business with significant deferred gains).

Step-by-step incorporation process (if you proceed)

1. Confirm 'business' status. Document your time commitment, portfolio composition and active management for at least 12-24 months before incorporation. Keep calendars, photos, contractor invoices, tenant communications. Specialist landlord accountant review essential.
2. Set up the receiving SPV. Companies House incorporation, correct SIC code (68209), business bank account.
3. Get current property valuations. RICS Red Book valuation for each property. Required for both Section 162 calculations and SDLT.
4. Calculate the CGT that would otherwise be due. Confirm the relief is worth claiming vs the SDLT cost.
5. Execute the transfer. Properties sold to SPV at market value. Conveyancing for each property (solicitor fees ~£600-£1,000 per property). SPV issues shares equal in value to the transfer minus any cash consideration.
6. Settle SDLT. Within 14 days of completion. Use the additional-property rate; non-resident surcharge if applicable.
7. Update the mortgages. Existing personal-name mortgages must be redeemed and replaced with SPV BTL mortgages. New lender(s) needed — see SPV mortgages. Significant cash needed for this step (deposit gap if LTV ratios differ).
8. File Self-Assessment claim. Section 162 relief is automatic but document the position on your SA return for the year of transfer.
9. Ongoing. SPV files annual accounts, CT600 and confirmation statement. Income flows differently (corporation tax + dividends rather than personal income tax).

Total incorporation cost for a typical 5-property portfolio: SDLT £40k-£100k + legal £3k-£5k + accountant £2k-£5k + mortgage arrangement fees £5k-£15k + valuations £2k-£4k. Order of £50k-£130k all-in. The CGT saved needs to materially exceed this for it to be worthwhile.