Did tax advisers, lawyers and lenders get landlord incorporation wrong?
The First-tier Tribunal has confirmed that refinancing at the point of incorporation can jeopardise full Incorporation Relief, while the Property118 Substantial Incorporation Structure avoids that risk. The warning was already contained in leading professional tax commentary, yet it was never absorbed into mainstream tax, legal and mortgage practice.
Property118 did not simply win its DOTAS appeal against HMRC. The Tribunal judgment has exposed a technical failure at the heart of what many highly qualified tax professionals, lawyers and the mortgage sector have treated as the conventional way to incorporate a mortgaged property business.
For years, advisers have commonly proceeded on the basis that the properties should be transferred into a company and the existing personal mortgages replaced with new company borrowing at completion. That process has been presented as the normal, orthodox or safest form of incorporation.
The Tribunal has now confirmed that it is not tax-equivalent to the structure recommended by Property118, which we labelled the Substantial Incorporation Structure, or SIS.
At paragraphs 150 and 151 of the published judgment, the Tribunal selected incorporation involving the transfer of legal and beneficial ownership, with the existing debt dealt with through novation, refinancing or another arrangement, as the appropriate comparison.
It then found that SIS:
“enables a person to obtain a tax advantage in that it enables him to obtain IR in full”
The judgment explains that full Incorporation Relief might not be obtained where refinancing takes place. It also confirms that the other tax consequences identified by HMRC were simply the ordinary consequences of incorporating a property business and were not additional advantages created by SIS. Most importantly, the Tribunal rejected HMRC’s case that obtaining the Incorporation Relief advantage was the main purpose of SIS.
The conclusion is unavoidable. Immediate company refinancing and SIS do not necessarily produce the same tax result. SIS can preserve full Incorporation Relief where conventional refinancing at completion can put it at risk.
That is not Property118’s interpretation of what the Tribunal might have meant. It is the Tribunal’s express finding.
The warning was already there
The risk created by refinancing was not invented by Property118, nor was it constructed retrospectively to defend the Tribunal proceedings.
It was already contained in Simon’s Taxes, one of the principal professional reference works used by accountants, tax advisers, solicitors and barristers.
Simon’s Taxes B9.114 warned that where a company raises its own finance and passes the proceeds to the transferor to repay the existing debts connected with the properties, there is a considerable risk that HMRC will decline to apply Extra-Statutory Concession D32.
It recommended that the finance should be appropriately restructured before incorporation.
The warning is reproduced and discussed at paragraphs 56 to 58 of the Tribunal judgment.
That warning goes directly to the distinction at the centre of the Tribunal’s finding. An existing business liability taken over by the company is not necessarily the same thing as a new company loan used to provide money to the former owners so that they can repay their personal mortgages.
Under section 162 of the Taxation of Chargeable Gains Act 1992, Incorporation Relief is available where a qualifying business is transferred to a company as a going concern, together with its assets, wholly or partly in consideration for shares.
Where the transferor receives consideration other than shares, the amount of relief can be restricted.
HMRC’s Capital Gains Manual at CG65745 explains that business liabilities taken over by the company are commonly dealt with by the company giving the transferor an indemnity. Extra-Statutory Concession D32 allows qualifying business liabilities taken over by the company to be ignored when calculating consideration other than shares.
The professional mistake was to assume that the concession necessarily produced the same result where the company did not assume the existing liability but instead raised entirely new finance and used it to put the transferor in funds to repay that liability.
Simon’s Taxes warned that this assumption was unsafe. The Tribunal has now confirmed why it matters.
Property118 solved a problem the mainstream market had failed to recognise
SIS was developed to allow the beneficial ownership of the property business to be transferred to the company while the existing mortgage liabilities and registered legal titles remained in the names of the former owners until refinancing became commercially appropriate.
The company indemnified the former owners against the business liabilities. The existing mortgage arrangements were preserved, legal title did not have to be transferred immediately and the company did not have to raise new money to repay the personal mortgages on the incorporation date.
That solved several problems simultaneously.
It avoided early repayment charges, new lender arrangement fees, fresh valuations and the legal costs of refinancing every property at once. It protected favourable existing mortgage rates, prevented a landlord from being forced into whatever company finance happened to be available on one particular day and allowed legal and beneficial ownership to be reunited later when refinancing made commercial sense.
It also dealt with the technical concern identified in Simon’s Taxes by avoiding the replacement financing transaction that could jeopardise full Incorporation Relief.
Property118 had always explained that SIS was built from established legal principles, HMRC guidance and recognised professional commentary. The Tribunal recorded that the names SIS and CAR were descriptive labels applied to professional practices and sequencing already reflected in Simon’s Taxes and HMRC’s manuals.
Property118 did not manufacture an artificial tax product. It joined together tax, legal, accounting and mortgage principles that the separate professions had failed to coordinate.
The evidence shows that the warning was overlooked
There is no need to speculate about whether the refinancing issue was understood across the professional market. The evidence recorded in the judgment provides the answer.
HMRC’s own witness accepted that the concern raised by Simon’s Taxes was valid. He also accepted that there had been considerable professional concern about whether ESC D32 applied where refinancing took place.
More remarkably, he had become aware of the issue and HMRC’s proposed clarification through this case rather than through his previous work. He had not considered the Office of Tax Simplification report when deciding that the Property118 arrangements should be issued with Scheme Reference Numbers.
The Tribunal recorded that he had no direct experience of advising landlords considering incorporation, had concentrated on a limited range of documents and website materials and had failed to examine the real-world commercial reasons landlords incorporated. The judgment described him as “not an impressive witness”.
The evidence from professional advisers was also revealing. Some understood that refinancing at incorporation could jeopardise full Incorporation Relief. Others who had been involved in advising incorporated property businesses were unfamiliar with the issue.
The judgment records that Mr Alan Pateman FCA (Managing Partner at Seagrave and Co chartered accountants) understood both the refinancing risk and the protection provided by SIS. By contrast, Mr Jones (Commercial Finance Broker), Mr Rose (Solicitor) and Mr Revell (Tax Adviser) were not familiar with the point that refinancing could threaten full Incorporation Relief.
This was not an obscure disagreement between two competing tax theories. The warning existed in one of the profession’s leading reference works, yet it had not become a standard part of mainstream landlord incorporation advice.
The tax profession had not absorbed it. The legal profession had not built it consistently into conveyancing and incorporation work. The mortgage sector continued to treat immediate company refinancing as the conventional route.
Property118 identified the disconnect and built a coordinated solution around it.
A failure created by professional silos
The most obvious explanation is that each profession looked only at its own part of the transaction.
Accountants and tax advisers considered whether the activities amounted to a business and whether the basic conditions of section 162 were met. Conveyancing solicitors concentrated on transferring registered title, redeeming the existing mortgage and satisfying the requirements of the incoming lender. The mortgage broker concentrated on affordability, valuation, loan-to-value ratios and the availability of limited company products. The lender concentrated on its security and underwriting policy.
Every adviser could therefore complete their own part of the transaction while nobody examined the tax consequences created by the interaction between them.
A solicitor who assumed that the registered titles had to be transferred immediately would require the existing mortgages to be redeemed. A broker would then arrange new company borrowing because that was the transaction the solicitor and client had requested. The accountants and tax advisers might have assumed that ESC D32 protected all borrowing associated with the properties without distinguishing between the original business liabilities and the company’s new finance.
The transaction would be described as a conventional incorporation even though its financing mechanics could place full Incorporation Relief at risk.
SIS broke through those professional silos. It treated tax, ownership, mortgage security, business liabilities and the client’s commercial objectives as one connected transaction.
That is why the structure produced a different result.
The mortgage sector cannot dismiss this as somebody else’s tax problem
Mortgage lenders and brokers are not responsible for deciding whether a landlord qualifies for section 162 Incorporation Relief. The financing transaction they arrange can nevertheless determine whether full relief is available.
There is a fundamental difference between a company indemnifying the former owners against the existing liabilities of the transferred business and the company borrowing new money which is then paid to the former owners to enable them to repay their personal mortgages.
That difference affects the nature of the consideration provided on incorporation. It therefore affects the tax analysis.
Mortgage advisers who told landlords that all existing loans had to be replaced on the day of incorporation should now ask whether they understood the warning in Simon’s Taxes B9.114. Lenders should ask whether novations, transfers of borrower, declarations of trust or deferred refinancing could have been accommodated instead of insisting upon a complete refinancing exercise.
The judgment also exposes a significant product-development opportunity. Lenders that develop properly underwritten routes for transferring, novating or subsequently refinancing existing property business borrowing can serve professional landlords who wish to incorporate without sacrificing favourable mortgage terms or putting full Incorporation Relief at risk.
This is not simply a tax issue; it is a financing issue with tax consequences.
The commercial reasons were real
HMRC attempted to present SIS and CAR through the narrow lens of tax avoidance. The Tribunal looked at the evidence and rejected that approach.
The independent Office of Tax Simplification Property Income Review found that the predominant reasons identified by professional bodies and advisers for landlord incorporation were not purely tax-related.
They included limited liability, access to finance, ring-fencing of debt, control over the timing of income withdrawals, succession planning and the ability to transfer ownership through shares.
The Tribunal found that the evidence given by Property118, the professional witnesses and the landlord clients reflected the findings of that independent government report. It recognised that incorporation is a major, long-term commercial decision and that the importance of tax and non-tax factors differs from one client to another.
The evidence about refinancing was compelling.
Advisers explained that clients wanted to retain favourable mortgage rates, avoid early repayment charges, delay legal and valuation costs and refinance when the market offered suitable terms.
One client owned 33 properties and faced estimated immediate refinancing costs of between £150,000 and £200,000, excluding the effect of any increase in mortgage rates. Another had £9.3 million of mortgages spread across several lenders.
Other clients could not refinance because of cladding problems. Some had dozens of separate mortgages. One landlord estimated that immediate refinancing would have cost more than £100,000 and required over 100 hours of administrative work.
The Tribunal found that users of SIS had two main reasons for using its particular features: obtaining full Incorporation Relief and avoiding immediate refinancing for genuine non-tax reasons.
That is precisely what Property118 had said throughout.
The clients led the decisions. They came to Property118 with existing businesses, mortgage commitments, succession objectives, retirement plans and real commercial constraints. Property118 coordinated the professional advice required to determine whether incorporation supported those objectives and how it could be implemented without destroying value in the process.
Simon’s Taxes contained a second warning
The refinancing warning in B9.114 was not the only relevant statement in Simon’s Taxes.
B9.112 advises that where an unincorporated business has a substantial positive capital account, the owners should draw it down before incorporation. If they do not, the value becomes locked into the shares issued by the company.
This matters because the capital account represents value already belonging to the owners of the unincorporated business. It can include original capital introduced, accumulated profits on which Income Tax has already been paid and other properly recognised amounts standing to the owners’ credit.
That balance cannot simply be converted into a tax-free director’s loan account on incorporation without affecting the consideration given for the transferred business. If the company owes the former owners that amount as part of the transaction, it may represent non-share consideration and restrict Incorporation Relief.
Where the capital is tied up in properties rather than held as cash, drawing it down before incorporation requires substitute funding.
That is the commercial and technical problem addressed by the Property118 Capital Account Restructure, or CAR.
The owners obtained temporary borrowing before incorporation and used it to release capital standing to their credit. They then lent corresponding funds to the new company, leaving the company owing genuine director’s loans to them after incorporation.
The Tribunal found that leading professional commentary supported the release of capital before incorporation. It also found that there was nothing unusual or contrived about obtaining short-term third-party finance and using the funds to finance the company through director’s loans for the purpose of preserving access to capital previously provided to the business.
Again, Property118 did not invent the underlying tax and accounting principles. It developed a practical means of implementing what the professional commentary said business owners should do.
HMRC rewrote BIM45700 while the judgment was reserved
The controversy does not end with the warnings in Simon’s Taxes.
The Tribunal hearing took place between 2nd and 13th February 2026. While the judgment remained reserved, HMRC rewrote BIM45700 on 1 July 2026. The judgment was released on 31 July 2026.
The timing does not establish HMRC’s motive, but the sequence of events is a matter of record. The guidance relied upon by Property118, reproduced by the Office of Tax Simplification and examined during the Tribunal proceedings was materially rewritten before the judgment was published.
HMRC’s official update record describes the change as providing clearer context and removing unnecessary numerical calculations.
That description understates what happened.
Before 1 July 2026, BIM45700 expressly recognised that a proprietor could withdraw business profits and capital introduced into the business even where substitute finance then had to be provided through interest-bearing borrowing.
The former guidance stated:
“The interest payable on the loans is an allowable deduction.”
It explained that the additional borrowing could be regarded as providing working capital for the business, subject to a restriction where the proprietor’s capital account became overdrawn.
This wording had stood for more than a decade. A tax discussion published in January 2014 quoted it directly from HMRC’s BIM45700, and the same wording is preserved in Wayback Machine snapshots from May 2017, September 2023 and February 2026.
The former numerical examples were not unnecessary. They were the means by which taxpayers and advisers could determine whether the proprietor was withdrawing genuine capital standing to their credit or borrowing beyond that amount to finance additional private expenditure.
From Rotterdam to Paris, with the answer reversed
The clearest evidence of the change is the contrast between HMRC’s former and replacement examples.
The former BIM45700 concerned Mr A, who owned a London flat originally bought for £125,000 with an £80,000 mortgage. When the property entered his rental business, it was worth £375,000, creating an opening capital account of £295,000.
Mr A increased the mortgage by £125,000 and used the money to buy a flat in Rotterdam. The borrowing remained below the value introduced into the rental business and his capital account was not overdrawn.
HMRC’s former guidance allowed the interest in full.
The Office of Tax Simplification reproduced that example in 2022 and stated that it demonstrated HMRC’s acceptance that interest on a loan raised to permit the withdrawal of capital could qualify for relief, provided the owner’s capital account did not become overdrawn.
The rewritten BIM45700 now contains an example involving Mrs H. She owns a London rental property, moves to Paris and increases the mortgage to buy her new private residence there.
HMRC now says that the interest on the additional borrowing is not allowable because the money was used to acquire a private asset.
The factual resemblance between the old Rotterdam example and the new Paris example is impossible to miss. In both cases, a proprietor increases the mortgage on a London rental property and uses the money to buy a private home overseas.
The answer has been reversed.
HMRC achieved that reversal by stripping out the figures which showed whether the proprietor had capital available to withdraw. The new example does not state the value of Mrs H’s property when it entered the business, her existing mortgage, her capital account or whether that account became overdrawn.
Those were not unnecessary calculations. They were the facts that determined the result under HMRC’s previous guidance.
Under the former BIM45700, the central question was whether the borrowing replaced capital genuinely standing to the owner’s credit without creating an overdrawn capital account. Under the rewritten version, HMRC treats the owner’s subsequent private use of the money as decisive in the Mrs H example.
Those are different approaches.
HMRC has not identified what changed in the law
The statutory wholly and exclusively test remains contained in section 34 of the Income Tax (Trading and Other Income) Act 2005.
HMRC’s update record does not identify any amendment to section 34 or any new binding judicial decision that required its longstanding guidance to be reversed.
HMRC manuals do not create or amend the law. They record HMRC’s interpretation of it.
The current BIM45700 still acknowledges that a proprietor may withdraw profits and capital even where the business subsequently requires interest-bearing borrowing. It then adds that simply exchanging capital for loan finance does not by itself satisfy the wholly and exclusively test and says that interest is allowable where the borrowing is used for business expenditure or business assets.
That wording shifts the analysis away from what the borrowing replaces within the business and towards what the proprietor does with the money released.
The implications extend far beyond somebody remortgaging a rental property to buy a holiday home. A positive capital account may include years of retained profits on which the landlord has already paid Income Tax. Those profits may have been left in the business to repay debt, fund improvements, support working capital or acquire further properties.
If HMRC now treats replacement borrowing as private because the owner later uses the returned money for retirement, succession planning, family support or another personal purpose, it can penalise the prudent proprietor who left taxed profits in the business instead of withdrawing them immediately.
The problem becomes more serious at incorporation because Simon’s Taxes tells the owner to draw down that capital before the business is transferred. If the owner follows that advice, HMRC’s rewritten BIM45700 can now be used to challenge the interest on the replacement finance. If the owner does not follow it, the capital can become locked into the shares and require dividends, a share sale, a capital reduction or liquidation before it can be accessed.
Property118 examined this problem in HMRC’s quiet rewrite could trap profits landlords have already paid tax on and formally asked HMRC to identify the legal basis for the change in its Open Letter concerning BIM45690 and BIM45700.
The question remains unanswered.
The rewrite cannot change the history
HMRC’s July 2026 rewrite cannot alter what BIM45700 said when SIS and CAR were developed, advised upon and implemented.
It cannot alter the fact that Simon’s Taxes advised owners to release substantial capital accounts before incorporation.
It cannot alter the fact that HMRC’s former guidance expressly contemplated substitute borrowing following the withdrawal of capital.
It cannot alter the Office of Tax Simplification’s published understanding that interest could qualify where borrowing enabled the withdrawal of capital without creating an overdrawn capital account.
It cannot alter the Tribunal’s finding that leading professional commentary treated the release of capital as normal, nor its conclusion that the CAR financing steps were not contrived or abnormal.
HMRC is entitled to revise its manuals where it concludes that its interpretation is wrong. It is not entitled to pretend that a materially different interpretation has always been the position, particularly where taxpayers and advisers relied upon the former published wording for more than a decade.
What the professions must now do
The tax profession must revisit the assumption that immediate company refinancing is equivalent to SIS for Incorporation Relief purposes.
Where advisers maintain that new borrowing raised by the company and paid to the transferors does not restrict relief, they must identify the statutory, concessional or judicial basis on which the new company liability is treated as the same business liability previously owed by the unincorporated owners.
Saying that refinancing is normal practice is not an answer.
Accountants and tax advisers should also review historic incorporations where a company raised new finance and provided the proceeds to the former owners to repay their existing mortgages. That does not mean every such transaction failed to obtain full relief. It means the financing documents, consideration and flow of funds must be examined rather than assumed to be harmless.
Solicitors and barristers involved in incorporation work must stop treating the conveyancing and tax stages as separate exercises. A transaction can transfer registered title perfectly, redeem every mortgage and satisfy every incoming lender while still producing an unintended tax result because of the form of consideration.
Mortgage brokers and lenders must recognise that the structure of the borrowing is not tax-neutral. Their insistence upon immediate redemption and replacement finance can affect whether the landlord receives full Incorporation Relief.
Professional indemnity insurers should also take notice. The judgment has placed the refinancing distinction firmly into the public domain. Continuing to ignore it will be far harder to defend than failing to identify it before the Tribunal exposed the issue.
What the judgment does not decide
The Tribunal proceedings concerned whether SIS and CAR were notifiable arrangements under the DOTAS legislation.
They did not determine that every landlord qualifies for section 162 Incorporation Relief, that every implementation produces its intended result or that every mortgage contract permits the relevant ownership and financing arrangements.
Eligibility for relief remains dependent upon the facts. There must be a qualifying business transferred as a going concern, the relevant assets must be transferred, the consideration and liabilities must be analysed correctly and the legal documentation must reflect what the parties actually do.
That does not weaken the article’s central conclusion.
The Tribunal expressly compared SIS with an incorporation involving refinancing and found that SIS enables the landlord to obtain full Incorporation Relief which might not be available under the refinancing route.
The appeals were allowed and HMRC’s Scheme Reference Numbers were cancelled because the requirements of the DOTAS descriptions relied upon by HMRC were not satisfied.
Property118 was right to challenge HMRC
Property118 was right to insist that landlord incorporation could not be understood by looking at tax in isolation.
It required an integrated analysis of the client’s business, existing mortgages, capital accounts, legal ownership, succession objectives, refinancing options and long-term commercial plans.
Property118 was also right to rely upon the legislation, ESC D32, HMRC’s published manuals, Simon’s Taxes and the commercial evidence of the landlords and advisers who had used the structures.
HMRC overlooked the Office of Tax Simplification report, failed to engage properly with the real-world reasons landlords incorporated and attempted to treat coordinated professional planning as a notifiable tax avoidance scheme.
The Tribunal rejected that case.
The judgment has now exposed two professional failures. The first was the assumption that immediate refinancing and SIS produced the same tax outcome. The second was the failure to act upon the clear warnings about refinancing and capital accounts contained in leading professional commentary.
The warnings were hiding in plain sight. Property118 identified them, built practical solutions around them and successfully defended those solutions against HMRC.
The tax, legal and mortgage professions must now explain why they did not.
HMRC also refused to meet with representitives of Property118 to discuss the points made in this article on three separate occasions spanning a year prior to the FTT hearing.
Evidence and source links
Readers should review the complete sources and obtain advice based on their own facts. Every external source used in this article is repeated below, with all links opening in a separate browser window or tab.
Tribunal judgment
Property 118 Limited & Anor v The Commissioners for HMRC [2026] UKFTT 1111 (TC)
https://caselaw.nationalarchives.gov.uk/ukftt/tc/2026/1111
The most relevant passages are:
- Paragraph 23: the potential restriction of Incorporation Relief where the company raises new finance to repay the existing mortgages and the uncertainty surrounding ESC D32.
- Paragraphs 40 and 41: the commercial and non-tax reasons for incorporation identified by the Office of Tax Simplification.
- Paragraphs 56 to 58: the warning in Simon’s Taxes B9.114 and Property118’s explanation of the financing problem.
- Paragraph 122: HMRC’s evidence concerning refinancing, ESC D32, Simon’s Taxes and its failure to consider the OTS report.
- Paragraphs 150 and 151: the finding that SIS provides a tax advantage by preserving full Incorporation Relief where refinancing can jeopardise it.
- Paragraphs 153 to 160: the Tribunal’s findings concerning the tax and non-tax reasons for incorporation and the costs and obstacles associated with immediate refinancing.
- Paragraphs 167 to 175: the analysis of CAR and the preservation of access to capital.
- Paragraphs 183 to 185: the finding that releasing capital was supported by leading professional commentary and that the CAR steps were not contrived or abnormal.
- Paragraph 187: the decision allowing the appeals and cancelling the Scheme Reference Numbers.
Incorporation Relief legislation
Section 162, Taxation of Chargeable Gains Act 1992
https://www.legislation.gov.uk/ukpga/1992/12/section/162
Transfer of liabilities and ESC D32
HMRC Capital Gains Manual CG65745
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65745
Simon’s Taxes
Simon’s Taxes professional tax reference service
https://www.lexisnexis.co.uk/products/tax/simons-taxes.html
The relevant subscription sections are B9.112, concerning substantial capital accounts before incorporation, and B9.114, concerning the risk created by company refinancing used to discharge the transferor’s existing property debts.
Current BIM45700
HMRC Business Income Manual: withdrawal of capital from a business
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700
HMRC’s July 2026 update record
Business Income Manual updates
https://www.gov.uk/hmrc-internal-manuals/business-income-manual/updates
The record describes the BIM45700 amendments published on 1 July 2026 as providing clearer context and removing unnecessary numerical calculations.
Archived versions of BIM45700
Wayback Machine snapshot dated 1 May 2017
Wayback Machine snapshot dated 24 September 2023
Wayback Machine snapshot dated 10 February 2026
Contemporary evidence of the earlier wording
January 2014 discussion quoting HMRC’s BIM45700
https://www.taxationweb.co.uk/forum/viewtopic.php?f=6&t=43129
Wholly and exclusively legislation
Section 34, Income Tax (Trading and Other Income) Act 2005
https://www.legislation.gov.uk/ukpga/2005/5/section/34
Office of Tax Simplification report
Property Income Review: Simplifying Income Tax for Residential Landlords
The relevant material includes the commercial reasons for incorporation and paragraphs 3.37 to 3.42 concerning borrowing used to release capital from a property business.
DOTAS legislation
Section 306, Finance Act 2004
https://www.legislation.gov.uk/ukpga/2004/12/section/306
Section 311B, Finance Act 2004
https://www.legislation.gov.uk/ukpga/2004/12/section/311B
Property118 analysis of HMRC’s rewrite
HMRC’s quiet rewrite could trap profits landlords have already paid tax on
Open letter to HMRC: What changed in the law behind BIM45690 and BIM45700?
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