Is Rental Income Passive or a Business? The 20-Hour Question

When it comes to property, one of the most common (and misunderstood) debates is whether rental income should be treated as passive investment income or as the profits of a business.

The distinction isn’t just academic. It can affect whether you qualify for incorporation relief, business asset disposal relief, or business property relief for inheritance tax. Get it wrong, and you might miss out on significant tax savings.

So… when does letting property cross the line into a business?

The Passive Income View

Traditionally, HMRC (and the courts) have treated rental income as investment income. You own an asset, you rent it out, you collect the income. Unless you’re doing something over and above, it’s seen as a return on capital, not a trade.

Cases such as Griffiths v Jackson (1982) and HMRC v Sargent (1976) confirmed that simply collecting rents and arranging basic maintenance does not amount to a business.

That’s why most landlords with buy-to-lets – even those with large portfolios – are still treated as investors rather than business operators.

The 20-Hour Case – “Earnest Endeavour”

Things got interesting in cases involving furnished holiday lettings (FHLs).

In one notable Upper Tribunal decision, the judge considered the fact that the owners spent 20 hours per week running their letting activities – dealing with guests, cleaning, linen changes, marketing, and bookings. He acknowledged this went far beyond casual oversight.

He described their efforts as an “earnest endeavour”, suggesting the work resembled that of a genuine business, not a hands-off investment.

But – and here’s the crucial point – even with that recognition, the court ultimately held that the activity still did not amount to a trade. Why? Because the fundamental nature of the activity was still the exploitation of land for rent, rather than providing a service business like a hotel.

What This Means for Landlords

So where does this leave you as a landlord?

• You might own 10 properties, but if they’re all managed by an estate agent, HMRC will almost certainly class your income as passive.
• Even if you’re heavily involved day-to-day, the hours alone won’t automatically turn rental income into trading income.
• To be treated as a business for tax purposes, you need to provide substantial additional services – think hotel-style accommodation, serviced apartments, or concierge offerings.

Possible Solutions

If your goal is to achieve trading status (for tax reliefs like incorporation relief or IHT business property relief), you may need to:

• Reposition your activities towards serviced accommodation, providing more than just a tenancy.
• Document your time and services carefully, showing it’s a business operation.

If, however, your properties are standard buy-to-lets, then the practical solution is to accept the investment income treatment and plan accordingly:

• Consider holding properties in a limited company for tax efficiency.
• Make full use of deductible expenses.
• Explore family planning options (Form 17, beneficial ownership splits, trusts).
• Review your structure regularly as your portfolio grows.

Final Thoughts

The key lesson? It’s not about the hours alone. You could work 20, 30, even 40 hours a week on your properties, but unless the services provided are substantial, HMRC will still see it as passive rental income.

That doesn’t mean there’s no room for planning – it just means your strategy needs to fit the reality of your setup.

At Taxes Done Right Ltd, we specialise in helping landlords and property investors understand the difference and plan tax-efficiently. Whether you’re running a hands-off portfolio or considering a move into serviced accommodation, we’ll guide you through the ifs and buts so you can make informed decisions.

📞 Call us on 0161 710 1901

📧 Email: Tax@TaxesDoneRight.co.uk

🌐 Visit: www.taxesdoneright.co.uk

We’re not just accountants – we’re property investors too, so we get it.