Why Property118 is NOT currently recommending s162 incorporation to landlords with mortgages

In February 2026, Property118 took HMRC to the First Tier Tribunal (Tax).

The hearing went on for 10 days.

We took this action because, since late 2023, HMRC has argued that the use of an indemnity for existing mortgage liabilities to be taken over by a company is a discloseable tax avoidance scheme. This is despite their own published guidance and concessions stating that this is what normally happens.

 

The above is NOT new; the HMRC guidance has retained this form for over 50-years!

HMRC has also recently taken the currently unpublished view (discovered via an FOI request) that if a company takes on new mortgage liabilities and uses those funds to redeem existing mortgage liabilities, such funds could be treated as taxable consideration under CGT rules.

The above is more plausible, in our opinion, and also according to established and highly regarded industry textbook guidance published by Lexis Nexis, which says as follows …

 

Established practice?

There could be a very strong established practice argument against this too. This is on the basis that HMRC has been unable to produce any evidence of having previously declined relief based their own consession (ESC/D32), even where the company took on new borrowing to repay liabilities which existed prior to incorporation.

Nevertheless, landlords who are considering any form of s162 incorporation, especially if they have mortgages or any other form of liabilities secured against their rental properties, should, in our opinion, defer their decisions to incorporate using s162 relief until absolute clarity is obtained in law. The mentally stressful and emotionally draining aspects of appealing an HMRC ruling cannot be underestimated, never mind the costs, which can easily run into six figures to pay for the necessary legal support.

Also consider that it took us nearly two years to get HMRC in front of the First-tier Tribunal. That is despite Property118 having always recommended what we regarded as the safer option, which was to follow HMRC’s own published guidance and to heed the risk warnings in Simon’s Taxes.

The above is intended to serve as a warning not only to landlords, but also to accountants, solicitors, barristers, mortgage brokers, lenders and financial advisers.

Tribunal outcome

We expect the First-tier tribunal to make a ruling later this year, but the losing side could then appeal to the Upper Tribunal and beyond, resulting in the wait for much needed clarity potentially being pushed back even further. Meanwhile, these matters continue to frustrate landlords who would like to incorporate their businesses for the reasons explained in HMRC’s GAAR Guidance Part D paragraph 2.2, as follows …

Property118 puts HMRC manual BIM45700 under FTT scrutiny

Since late 2023, HMRC has argued that financing the withdrawal of a positive capital account balance prior to incorporation of a business is a notifiable tax avoidance scheme under DOTAS legislation.

From our perspective, this makes no sense because that practice is supported by highly regarded industry textbook guidance published by Lexis Nexis, which says as follows …

More importantly, HMRC’s own manual BIM45700 clearly states:

A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest bearing loans. The interest payable on the loans is an allowable deduction. This is on the basis that the purpose of the additional borrowing is to provide working capital for the business. There will, though, be an interest restriction if the proprietor’s capital account becomes overdrawn, see BIM45705 onwards.

Source: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45700

Important context: Property118 is not currently recommending Section 162 incorporation for landlords with mortgages while legal uncertainty remains over the treatment of mortgage liabilities. Read our current position here: Why Property118 is not currently recommending s162 incorporation to landlords with mortgages

The reason for our current position is not that the underlying principles are wrong, but that HMRC’s current interpretation conflicts with its own published guidance.

The above is intended to serve as a warning not only to landlords, but also to accountants, solicitors, barristers, mortgage brokers, lenders and financial advisers.

What our critics say

Some influencers have suggested that the timing of the financing of capital withdrawn, being so close to the date of incorporation, is abusive. We disagree on the basis that there is no evidence supported by legislation or HMRC manuals to support this stance, hence taking the case to the FTT.

They also argue that using the funds to loan to the company, immediately post-incorporation, and for the company to repay the debt quickly, is also abusive. Again, we disagree based on the same principles.

Finally, our critics have suggested that transferring only beneficial interest at incorporation is also abusive and constitutes a breach of mortgage terms, and that mortgage novation is the only acceptable method. Again, we disagree on the basis that it is common knowledge that taxation follows beneficial interest and that the Law of Property Act 1925 protects the interests of mortgage lenders even if liabilities are indemnified without the lender’s consent or knowledge. Furthermore, novation has not been mentioned in the relevant HMRC manuals since the phrase indemnity was introduced into them over 50 years ago, and in any event, very few, if any, mortgage lenders now offer novation.

Tribunal outcome

We expect the First-tier tribunal to make a ruling later this year, but the losing side could then appeal to the Upper Tribunal and beyond, resulting in the wait for much needed clarity potentially being pushed back even further. Meanwhile, these matters continue to frustrate landlords who would like to incorporate their businesses for the reasons explained in HMRC’s GAAR Guidance Part D paragraph 2.2, as follows …

The commercial reasons landlords choose to incorporate their rental property business were also documented in a report published by the Office of Tax Simplification in November 2022.

Source: https://www.gov.uk/government/publications/ots-review-of-residential-property-income

Property118 highlights HMRC manual SDLTM07700 in ongoing FTT debate

There is a recurring assumption in recent commentary that tax consequences only arise once legal ownership of property has formally transferred. It is an understandable assumption, but it is also, in many cases, incomplete.

As the ongoing First-tier Tribunal in the DOTAS case of Property118 vs HMRC examines the interaction between incorporation, financing, and tax treatment, it is worth revisiting what HMRC’s own guidance actually says about when a transaction is recognised for tax purposes.

What HMRC says about “substantial performance”

HMRC’s Stamp Duty Land Tax Manual confirms that a transaction can be treated as having taken place before legal completion, where a contract has been substantially performed.

The guidance is set out here: https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm07700

In simple terms, where substantial performance occurs, the contract itself is treated as the effective transaction for tax purposes, even if legal title has not yet transferred.

HMRC goes on to explain that substantial performance can arise where, for example:

• possession of the property is taken, or
• rents or income begin to flow to the acquirer (e.g. tenant begins paying rent into the acquiring company bank account), or
• consideration has been paid in a way that reflects the economic reality of the arrangement (e.g. issue of shares or share premium)

This is not an obscure or newly developed concept; it has been part of the UK tax framework for many years.

Why this matters in the current debate

The relevance of this guidance is not that it proves any particular structure is effective, it is that it highlights a broader and well-established principle: tax law does not always wait for legal title to catch up with economic reality.

That distinction between legal ownership, and beneficial or economic entitlement runs through multiple areas of UK tax legislation.

It also explains why HMRC manuals, case law, and professional guidance have long recognised situations where tax consequences arise at a different point in time to legal completion.

Connecting the dots with BIM45700

Taken together, BIM45700 and SDLTM07700 illustrate a consistent theme within HMRC’s own published material:

1. commercial transactions are often recognised based on their economic substance
2. financing and ownership do not always move in perfect legal alignment, and
3. tax legislation accommodates that reality

A question of interpretation, not invention

The purpose of the ongoing Tribunal proceedings is not to establish something entirely new, it is to determine how established principles, many of which are reflected in HMRC’s own manuals, should be applied in practice where incorporation and financing interact. The inclusion of SDLTM07700 in this discussion is therefore not about stretching legislation, it is about recognising that the relationship between legal form and tax treatment has always been more nuanced than a simple transfer of title.

Where this leaves landlords and advisers

For landlords, accountants, and advisers, the position remains one of careful consideration.

The commercial drivers behind incorporation remain unchanged. These include:

• long-term business continuity
• improved lender stress-testing
• ring-fencing of some liabilities
• holding profit for reinvestment or repayment of debt
• succession planning

However, until there is greater clarity on HMRC’s current interpretation, particularly in relation to mortgaged property, a cautious approach to s162 incorporation is appropriate.

A conversation worth having?

If you are weighing up your own strategy, whether that involves holding, restructuring, or reducing your portfolio, it is worth stepping back and reviewing how everything fits together.

Our consultancy does not start with a recommendation. It starts with understanding what you are trying to achieve, and whether your current structure supports that.

These conversations are typically most useful for landlords with established portfolios and relatively modest borrowing who are beginning to think about how their assets will serve them over the next phase.

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