Would you pay £200,000 CGT for a £2.8 million director’s loan account?

Most landlords considering incorporation want to know how they can defer Capital Gains Tax. One landlord is preparing to do the opposite and pay HMRC approximately £200,000 now.

Why? Because, according to a LinkedIn post by accountant Alexandre Norian FCCA, the transaction would leave him with a director’s loan account of £2.8 million in the new company.

At first glance, that sounds like an extraordinary exchange. Pay £200,000 in tax today and gain access to £2.8 million later without dividend tax. Why would anybody claim Section 162 Incorporation Relief if that alternative is available?

The answer is that the £2.8 million has not been created by paying the tax. It is the landlord’s existing net value in the business, represented in a different legal and accounting form. The real question is whether paying the CGT now buys enough commercial flexibility and future extraction capacity to justify its cost.

The stated 24% rate is plausible for this landlord, but it is not a universal rate for every pound of gain. Under the current CGT rates, individuals pay 18% to the extent that a gain falls within their unused basic-rate band and 24% above it. Where an LLP has several members, the gain and available relief must be calculated for each member rather than treating the LLP as one taxpayer.

On the simplest arithmetic, £200,000 of CGT at 24% represents a taxable gain of about £833,000. The £2.8 million loan account represents net value transferred. The figures can therefore be entirely consistent because one measures the gain and the other measures the landlord’s equity.

Why this choice has become more visible

For business transfers completed before 6 April 2026, Section 162 relief generally applied automatically when its statutory conditions were satisfied. A taxpayer who did not want it had to elect under Section 162A for it not to apply.

That changed on 6 April 2026. HMRC’s updated guidance at CG65735 confirms that Incorporation Relief must now be claimed. The claim must identify the disposals, the amount of relief requested, the assets and values, the shares issued and any consideration given in another form. Property118 has explained the new process in our guide to Section 162 Incorporation Relief claims.

That makes the decision more explicit. A landlord can consider claiming all of the available relief, claiming only part of it, or making no claim. However, the best answer cannot be found by looking only at the tax payable on completion.

What Section 162 relief actually defers

Section 162 does not normally carry the properties’ historic purchase costs into the company. On a transfer between connected parties, the company will generally be treated as acquiring the assets at market value. HMRC confirms that the transferee is treated as acquiring at market value, even where an asset is transferred at an undervalue. The relief works separately at shareholder level by reducing the base cost of the shares received, thereby rolling the landlord’s gain into those shares.

That distinction matters because the original post describes the director’s loan account as solving “double taxation in the limited company”. I would put it differently. The commercial advantage of the loan account is not that it repairs the company’s property base costs. Its attraction is that it can give the landlord a long runway for withdrawing capital as repayment of a genuine debt, instead of relying entirely on salary or dividends.

HMRC itself recognises that a credit to a director’s loan account is consideration other than shares. Its worked example at CG65760 shows part of a business transfer being credited to a director’s loan account, with the immediate gain and the remaining Incorporation Relief calculated accordingly.

This is therefore not necessarily a binary choice between “full relief and no loan account” or “£200,000 of CGT and a £2.8 million loan account”. Depending on the facts and the consideration, there may be a spectrum of outcomes between those two positions.

Why paying CGT can still make commercial sense

A director’s loan account in credit records money that the company genuinely owes to the director. HMRC describes an in-credit balance in exactly those terms. Subject to the company having sufficient cash, remaining solvent and the underlying transaction being genuine and properly documented, repayment of that debt is not the same as a dividend.

For a landlord planning retirement drawings over many years, that can be extremely valuable. The company may use future cashflow or commercially suitable refinancing to repay the loan in stages. Corporation Tax may already have been paid on rental profits used to fund those repayments, but there is not then a second personal tax charge merely because a genuine creditor balance is being repaid.

The landlord in Alexandre’s example reportedly has a modest loan-to-value ratio and can fund the £200,000 CGT by increasing borrowing by about five percentage points. He is also prepared to absorb another early repayment charge. In his circumstances, exchanging a known upfront cost for access to £2.8 million over future decades may be entirely rational.

There is still an accounting point to reconcile. HMRC treats tax arising from the transferred business as the transferor’s personal liability. If company funds or company borrowing are used to settle it for him, that payment cannot simply be ignored when determining what the company still owes him.

The company is also outside the individual landlord finance-cost restriction commonly known as Section 24. Qualifying company interest is dealt with under the Corporation Tax loan relationship rules. That does not mean the Government refunds “100% of the mortgage interest”, but it does mean that qualifying finance costs are not restricted to the basic-rate tax credit imposed on individual residential landlords.

The commercial case is strongest where the landlord expects to need substantial personal drawings, the company can realistically generate or borrow the cash required to repay the loan, the cost of financing the CGT is acceptable and the projected personal tax saved on future extraction materially exceeds the upfront cost.

A director’s loan account is not free money

The phrase “£200,000 in exchange for £2.8 million” is excellent for attracting attention, but it is not the economic calculation. The £2.8 million was already the landlord’s value. Incorporation changes its form.

The proper comparison should include:

the immediate CGT and, for taxable UK residential property gains, the normal 60-day reporting and payment deadline;
Stamp Duty Land Tax, Land Transaction Tax or Land and Buildings Transaction Tax;
early repayment charges, arrangement fees, valuation fees and legal costs;
the interest cost of borrowing to pay the CGT and other transaction costs;
the company’s ability to produce cash with which to repay the loan;
the amount and timing of personal drawings the landlord actually expects to need;
the tax that would otherwise be paid on dividends or other extraction;
the tax position after the loan account has eventually been exhausted; and
the effect on succession, control and family wealth.

If the landlord never needs to draw most of the £2.8 million, paying £200,000 now may prove expensive. If the landlord expects to use it steadily over the next 20 years, the conclusion could be very different. This is a present-value and cashflow calculation, not a slogan.

The LLP and Stamp Duty questions cannot be skipped

The portfolio in the example is held through an LLP. That could be highly relevant, but the letters “LLP” do not themselves produce a particular tax result.

Nor can the entire £2.8 million automatically be credited to one member. The creditor balances must reflect the members’ actual economic and capital entitlements under the LLP agreement and the transfer documents.

For properties in England or Northern Ireland, a transfer to a connected company can bring the SDLT market-value rule into play. Where property is transferred from a genuine partnership or LLP, the special partnership provisions in Schedule 15 may alter the chargeable consideration, sometimes substantially. The outcome depends on the history of the partnership, the members, their economic interests, their connections with the company and the exact transaction. HMRC’s own example demonstrates how fact-sensitive that calculation is.

Scottish properties are subject to LBTT and Welsh properties to LTT, with their own legislation. A compelling CGT and loan-account calculation can be destroyed if the land tax, refinancing and legal-title costs have been assumed away.

The IHT point needs more care

The post also says the arrangement helps the landlord “chip away” at an Inheritance Tax problem because he will spend money from his estate over the coming decades. That may ultimately happen, but the director’s loan account does not itself remove value from the estate.

HMRC’s Shares and Assets Valuation Manual states that a sum due from a company to a deceased person does not qualify for Business Relief and that a debt repayable on demand will normally be valued at face value. In other words, a £2.8 million director’s loan account is ordinarily a £2.8 million estate asset.

If the company repays £100,000, the landlord has exchanged a £100,000 debt for £100,000 of cash. His estate has not reduced merely because the money moved bank accounts. It reduces if the money is then genuinely spent or given away, subject to the normal rules governing lifetime gifts.

A properly designed family investment company structure may help move future growth to other family members while the founder retains an appropriate level of control and income. However, calling a property company an “FIC” achieves nothing by itself. The share rights, valuations, governance, gifts, trusts and family objectives must all work together. HMRC’s guidance excludes businesses which consist wholly or mainly of making or holding investments from Business Relief, so a conventional property investment business should not assume that its shares will qualify.

Paying £200,000 to HMRC certainly reduces the estate by £200,000, but only because HMRC now has the money. That is not an IHT strategy on its own.

Does paying the CGT buy certainty?

There is an understandable attraction in paying a known 24% CGT liability rather than wondering whether the rate might change. The next Budget is scheduled for 28 October 2026, and nobody outside Government knows what the Chancellor will announce.

Not claiming Section 162 relief removes the need to defend entitlement to that particular relief. It does not make the entire transaction immune from enquiry. HMRC may still examine the market values, the existence and ownership of the business, the LLP records, the consideration, the director’s loan, the land-tax treatment and whether the documents match what actually happened.

Writing HMRC a cheque is not the same as receiving a clearance certificate.

There may be more than two routes

For one landlord, maximum Incorporation Relief may remain the obvious answer. Another may decide that paying all the CGT now produces a valuable loan account and a better retirement cashflow. A third may claim only part of the available relief and accept a smaller immediate tax bill in return for a smaller creditor balance.

Where a genuine partnership or LLP already has substantial positive capital accounts, it may also be necessary to consider whether historic capital can be withdrawn before incorporation with substitute business funding introduced. That is the commercial problem addressed by the Capital Account Restructure. It is different from simply crediting an amount to a director’s loan account as consideration on incorporation, because that non-share consideration can restrict Section 162 relief.

This is why the client’s objective must come first. The modelling should compare the available routes, show the cost and benefit of each over time and allow the client to decide which commercial outcome matters most. The tax and legal advisers can then validate and implement the chosen route.

The right answer is not always “claim the maximum relief”. Equally, a director’s loan account is not free money. The sensible answer is to model what each route costs, what it buys and whether the company can actually deliver the future cash the landlord is expecting.

If you are considering incorporation and want to compare the commercial effect of claiming all, some or none of the available Section 162 relief, you can book a Property118 consultation here. We can help you frame the alternatives, identify the professional workstreams and decide what your property business needs to achieve before any transaction is undertaken.

Important: This article provides general information, not personal tax, legal, accounting, mortgage or financial advice. The outcome depends on the facts, valuations, ownership, transaction documents, jurisdiction and law in force at the relevant time. Appropriate advice should be obtained from suitably qualified and insured professional advisers before acting.

Why experience matters when incorporating a property business

I’m going to say this plainly: no other organisation has more practical experience of landlord incorporation than Property118.

That is a bold claim, but it is one we have earned the right to make. We have conducted thousands of consultations with landlords, helped hundreds to incorporate their property businesses and supported clients through HMRC compliance checks and Discovery Assessments.

We have also taken our own landlord incorporation model all the way through a 10-day First-tier Tribunal hearing against HMRC.

I am not aware of any other organisation that can match that experience.

Setting up a company is the easy bit

Some landlords think incorporation means setting up a limited company and transferring their properties into it.

I wish it were that simple.

A company can be formed online in a few minutes. The difficult part is working out whether transferring your existing property business into that company makes sense in the first place.

What happens to your mortgages? How will you take money from the company? Should your children become shareholders now or later? What happens if you die? Will you still be able to sell individual properties? Should the mortgages be refinanced immediately, or would that destroy good interest rates and trigger substantial fees?

Then there are the Capital Gains Tax and Stamp Duty Land Tax questions.

Getting just one of those things wrong can be extremely expensive.

Most landlords are trying to solve business problems

The landlords who come to Property118 are rarely looking for a tax scheme. Most have spent decades building their portfolios and are trying to work out what comes next.

Some want to reduce their personal exposure to business risks. Some want to bring their children into the business without immediately handing over everything they have worked for. Others are approaching retirement and want the property business to continue after they are no longer able to run it.

Many do not want to refinance 10, 20 or 30 properties on the same day simply because an adviser tells them that is how incorporation is normally done. They may have valuable mortgage rates, early repayment charges or lenders that will not offer an equivalent company mortgage.

Those are real commercial problems. Tax is important, but it is part of the picture rather than the whole picture.

That distinction matters because the right structure should follow the landlord’s objectives. The structure should not be chosen first and then dressed up with reasons afterwards.

Experience earned the hard way

Property118’s incorporation work has probably been examined more closely than any other landlord incorporation model in the country.

HMRC allocated Scheme Reference Numbers to two arrangements connected with our work. Critics called us scheme promoters, cowboys, grifters, clowns and considerably worse. Some expected us to disappear and leave our clients to deal with the consequences.

We did not.

We stopped taking on new incorporation consultancy while the dispute was being resolved. We supported clients through HMRC enquiries, instructed leading counsel and appealed against HMRC’s decisions.

The hearing lasted 10 days and involved thousands of pages of evidence. On 31 July 2026, the Tribunal allowed the appeals and cancelled HMRC’s Scheme Reference Numbers.

That does not mean the Tribunal decided that every landlord should incorporate or that every landlord automatically qualifies for every available tax relief. It did not. The case was about whether the arrangements had to be disclosed under the DOTAS rules.

What it does mean is that HMRC’s attempt to treat the arrangements as notifiable tax avoidance schemes failed after a full hearing.

There is a considerable difference between commenting about landlord incorporation from the sidelines and standing behind clients when HMRC comes knocking.

We have done the latter.

Why one professional is rarely enough

An accountant may understand the tax. A solicitor may understand the legal documents. A mortgage broker may understand the finance.

All three may be perfectly competent within their own areas, but that does not necessarily mean anybody is looking at the transaction as a whole.

A solicitor might insist that all legal titles must be transferred immediately. That could force the landlord to repay every existing mortgage. A broker might then arrange new company mortgages because that is what the solicitor has requested. The accountant might assume the refinancing has no effect on the available tax reliefs.

Each professional completes their own part of the job, but the landlord can still end up with a poor overall result.

Property118’s role is to bring the tax, legal, accounting, mortgage and commercial considerations together around what the client is actually trying to achieve.

That is where our experience is different.

Sometimes the right answer is not to incorporate

Having more experience does not mean recommending incorporation to everybody.

For some landlords, incorporation can improve business continuity, refinancing flexibility, succession planning and the ability to retain profits for future investment.

For others, the tax costs, mortgage position, intention to sell properties or need to withdraw most of the rental income can make incorporation unsuitable.

We regularly tell landlords not to incorporate when the figures or their plans do not justify it. A limited company is a tool, not a religion.

The purpose of a Property118 consultation is not to sell a predetermined structure. It is to understand what the landlord wants to achieve and then work out whether incorporation helps.

Begin with the right question

The wrong question is:

“How do I transfer my properties into a limited company?”

The right question is:

“What do I want my property business to achieve for me and my family, and is incorporation the best way to achieve it?”

Property118 has more experience of helping landlords answer that question than any other organisation.

We have not simply read about landlord incorporation or commented upon it. We have planned incorporations, coordinated their implementation, supported clients through HMRC investigations and defended our work before the Tribunal.

Isn’t that the sort of experience you want behind you?