9:52 AM, 8th October 2024, About a month ago 20
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Property118 categorically rejects the DOTAS characterisation of our tax planning structures, specifically the Substantial Incorporation Structure (SIS) and Capital Account Restructure (CAR). These strategies’ are a commercial necessity rather than any tax avoidance intent.
To clarify, the Substantial Incorporation Structure (SIS) is fully compliant with UK tax law, as evidenced by long-standing legal precedents. Notably, the case of Gordon vs IRC [1991] STC 174 provides crucial insights into the transfer of beneficial interest and the application of Incorporation Relief under Section 162 of the Taxation of Chargeable Gains Act (TCGA) 1992.
In this case, the court ruled that the transfer of beneficial interest in property can form part of a legitimate business transaction without triggering immediate Capital Gains Tax (CGT) liabilities, provided that the entire business is transferred to a company in exchange for shares. This decision supports the incorporation relief principle, which defers CGT until the eventual disposal of the shares, rather than at the point of transfer.
Property118 applies the same principle in its SIS framework, where the beneficial ownership of properties is transferred into a company, deferring CGT under Section 162 TCGA. This is fully in line with UK tax law, as SIS focuses on legitimate business restructuring, allowing landlords to continue their operations under a more commercially viable structure without triggering immediate tax liabilities.
It is crucial to emphasise that the primary motivation behind SIS is not tax optimisation but the commercial benefits it provides to landlords. SIS helps landlords to overcome significant financial and operational challenges as they seek to incorporate their property businesses.
By incorporating their property businesses into a corporate structure, landlords can create a more durable framework that allows for the seamless continuation of their business operations. Incorporation provides landlords with the ability to:
Many landlords have been affected by the Section 24 restrictions, which limit the deductibility of finance costs (such as mortgage interest) from rental income. By incorporating their business through SIS, landlords can navigate these restrictions, as corporate entities are not subject to the same rules. This helps to alleviate the cash flow pressures many landlords face under the new tax regime, enabling them to maintain profitability while meeting their financing obligations.
One of the major hurdles landlords face during incorporation is dealing with existing financing arrangements. Many lenders are unwilling to novate (transfer) existing mortgages when properties are being transferred from personal to corporate ownership. This reluctance is often due to perceived risks or because the lender’s policies don’t accommodate such restructures. However, Substantial Incorporation Structure (SIS) provides a solution by allowing landlords to defer the immediate need for refinancing, thus avoiding the costs and hassle of renegotiating financing at the point of incorporation.
SIS focuses first on the transfer of beneficial ownership while retaining the legal ownership in the landlord’s name. This ensures that the lender’s security over the property remains intact under Sections 85-87 and Section 114 of the Law of Property Act (LPA) 1925. By keeping the legal title in the original owner’s name during the incorporation process, the lender’s legal charge on the property is unaffected, meaning they retain full security against the borrower’s mortgage obligations.
This structure offers several key advantages:
In summary, SIS enables landlords to postpone refinancing, reducing the immediate pressure of lender engagement while ensuring that the lender’s security remains fully intact under LPA 1925. This not only minimises the disruption to the business but also allows landlords to secure better refinancing terms once the corporate entity is firmly established.
SIS mitigates risks identified in Simon’s Taxes at B9:114 …
“The incorporation of a buy-to-let property business may involve refinancing the existing mortgages which could possibly prevent HMRC applying ESC D32. If the company does not assume the same liabilities of the transferor, but instead raises finance of its own, which is passed to the transferor to settle its debts related to the properties being transferred, there is considerable risk that HMRC might choose not to apply its concession.”
The above expert guidance from Simon’s Taxes is clearly derived from HMRC’s explanation of ESC D32 in CG65745, in particular the words “indemnity” and “taken over”.
SIS is designed to protect landlords, not to circumvent tax obligations.
In evaluating the SIS, it is important to apply the well-established legal principle of substance over form. This principle, supported by UK tax law, dictates that the true nature and purpose of a transaction should be assessed based on its substance, not its legal form.
The substance of the SIS transaction is clear: it allows landlords to transfer beneficial ownership of their properties to a company in a way that avoids immediate refinancing burdens. The commercial reality is that landlords need flexibility, and SIS provides a practical, commercially driven solution to that problem.
The substance of SIS is consistent with the commercial purpose of incorporation. The SIS structure is designed to assist landlords in navigating complex financial and legal challenges, particularly those related to financing, rather than being a tax-driven mechanism.
It is essential to address mischaracterisation of SIS as a tax avoidance mechanism. Any positive tax outcomes arising from incorporation, such as the potential for Capital Gains Tax deferral, are merely incidental to the main commercial drivers of SIS. Incorporation Relief under Section 162 TCGA is a statutory relief intended to support the incorporation of businesses—our clients simply utilise the relief as intended by Parliament, in line with the Gordon vs IRC decision.
The crux of our rebuttal is that avoiding refinancing and the potential for tax advantages associated with incorporation appear to have been conflated in the assessment of SIS. The decision to incorporate a property business and claim any associated reliefs (such as those under TCGA 1992, s. 162) is a statutory right, available to taxpayers who meet the relevant criteria. By contrast, SIS is a specific strategy designed to overcome financing challenges faced by landlords at the point of incorporation, particularly where mortgage lenders are unable or unwilling to agree to ovation. Given that SIS has no impact on tax outcomes whatsoever the DOTAS hallmarks cannot possibly be applied to the structure.
We believe that Dan Neidle’s public critique has directly influenced HMRC’s current stance towards SIS and CAR. This is evident in the issuance of Scheme Reference Numbers (SRNs) under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations for these structures. Despite nine years of compliance checks and Closure Notices issued by HMRC without any further tax due, the sudden change in HMRC’s approach reflects a misunderstanding of the commercial drivers behind SIS and CAR. These structures were designed to overcome real-world financial obstacles faced by landlords, particularly in refinancing their portfolios.
In response to these misconceptions, we have been in regular communication with HMRC to clarify the legitimate commercial purposes behind SIS and CAR. Furthermore, Property118 is fully prepared to defend our clients’ interests before the First-Tier Tribunal (FTT), where we will present detailed evidence demonstrating the commercial legitimacy of these strategies, supported by clear legal precedents, such as Gordon vs IRC.
Our clients’ compliance with HMRC’s guidance and the broader commercial realities faced by landlords will be central to our argument. This ongoing dialogue and legal defence are part of our commitment to ensuring that our clients’ interests are robustly protected against unfounded allegations.
If you think HMRC is overreaching and want to help us stand up for landlords, please consider supporting the Property118 Action Group. With your help, we can push back against these unfair actions and defend the rights of landlords everywhere.
Visit our JustGiving page to donate. Every contribution helps us fight back and hold HMRC accountable. Together, we can make a real difference.
Northernpleb
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Sign Up18:01 PM, 7th October 2024, About a month ago
Hello Mark ,
I have little or no experience of this , Hence a have a few questions that may seem like I am a bit dim ( No I am not applying for Parliament)
1 How long do you estimate the legal review will take anything Lega cases l can take years and cost a fortune ?
2 How do Companies that are not BTL transfer their Loans and charges over when they change to a Corporate Structure ,
3 To Remortgage from a Private to Corporate Mortgage along with Legal fees , Valuations etc TMW has a 5 % fee on the mortgage and would probably require full underwriting. Would it be possible for Current Landlord to Transfer The Mortgage to Corporate whilst standing Guarantor.
4 Why as revenue decided it cannot be done your way after 7 years. They must have passed some over the time .
5 Is There any Building Societies that have shown an interest in in a deferred Transaction.
Regards
Mark Alexander - Founder of Property118
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Sign Up19:03 PM, 7th October 2024, About a month ago
Reply to the comment left by Northernpleb at 07/10/2024 - 18:01
Thank you for your thoughtful questions. I'll address each point clearly, based on the principles of the Property118 incorporation models and the realities of transferring to a corporate structure:
Time to Resolve the SRN Case with HMRC: The resolution of the case involving HMRC’s challenge to the Property118 incorporation models and the issuance of Scheme Reference Numbers (SRNs) can indeed take time, as it involves detailed legal and regulatory processes. While HMRC cases, particularly those related to SRNs, may extend over several years, the Property118 team, along with its legal and tax advisers, is actively working to ensure a robust defence. The exact timeline depends on various factors, including the complexity of the case, HMRC's review procedures, and the potential involvement of tribunals or courts. However, it’s important to note that while the process is ongoing, the underlying commercial and legal foundations of the SIS and CAR models remain solid.
Transferring Loans and Charges to a Corporate Structure: Companies that are not Buy-to-Let (BTL) landlords can face challenges in transferring loans and charges when moving to a corporate structure. In the SIS model, legal title to the properties remains with the landlord during the incorporation, ensuring that lenders' charges remain secure. Beneficial ownership is transferred to the company, and refinancing happens later when commercially viable. Lenders are typically comfortable with this approach as it protects their security until the final legal title transfer. Sections 85-87 of the Law of Property Act 1925 safeguard lenders' interests throughout the process.
Remortgaging to a Corporate Mortgage: Mortgage lenders, like The Mortgage Works (TMW), often impose fees and require full underwriting during remortgage processes. In the SIS structure, landlords can retain legal title, avoiding the need for immediate refinancing. A landlord can act as a guarantor, offering flexibility when the company takes over the beneficial ownership. This can make refinancing smoother when the time comes. Many lenders have successfully engaged with this structure, ensuring that the mortgage remains secure.
HMRC’s 7-Year Timeline: HMRC's recent focus on challenging these structures does not negate their legal validity. For several years, landlords have successfully adopted SIS and CAR models without issue. HMRC’s scrutiny does not mean that the structure is flawed, but rather reflects a shift in their approach to review these cases. The legal basis for SIS remains strong, and many cases have been resolved in favour of the structure. It’s essential to remain commercially focused and legally compliant, as these challenges are often driven by HMRC's evolving priorities, not fundamental flaws in the model.
Building Societies and Deferred Transactions: Several lenders have shown flexibility when it comes to deferred transactions in SIS structures. While not all building societies may officially advertise their involvement in such structures, lenders have consistently supported landlords through the refinancing phase once beneficial ownership is transferred to a company. This approach aligns with the commercial realities of managing property portfolios and the eventual transfer of legal title.
For personalised advice and further discussion, we recommend booking a 60-minute Zoom consultation with one of our Property118 consultants. You can schedule the consultation via this link: https://calendly.com/property118/consultation
John Parkinson
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Sign Up11:02 AM, 8th October 2024, About a month ago
I don't understand why structuring your business to minimise tax liability is wrong?
In Ayrshire Pullman Motor Services & Ritchie v CIR ((1929) 14 TC 754) Lord Clyde remarked:
"No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow - and quite rightly - to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer's pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue".
Northernpleb
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Sign Up11:12 AM, 8th October 2024, About a month ago
Reply to the comment left by Mark Alexander - Founder of Property118 at 07/10/2024 - 19:03
Thanks Mark for the Explanation,
I do hope it is sorted with the Legal Case quickly. and not drag on.
At the moment it is causing Confusion and anxiety.
Your Solution to existing Mortgages on Transfers from Private to Corporate certainly makes sense and is cost effective . If some Lenders are agreeable it must have been accepted I presume by the Council of Mortgage Lenders and Hence by HMRC.
With regards to the Cost of Re-mortgaging from Private to Corporate I think a lot of the fee increases imposed by Lenders is due to the pending introduction of the Renters Reform Bill.
There is a lot more Risk to the Lenders .
I will be in touch in the near future
Regards
Mark Alexander - Founder of Property118
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Sign Up11:18 AM, 8th October 2024, About a month ago
Reply to the comment left by John Parkinson at 08/10/2024 - 11:02
Thank you for your comment, John. You raise an important point, and structuring a business to minimise tax is not inherently wrong. It remains an accepted part of tax planning. What is critical, however, is ensuring that any tax-efficient arrangements are commercially justified and comply with the substance of the law. HMRC’s concerns often arise where structures are seen to lack genuine commercial purpose or are designed primarily as tax avoidance schemes rather than for legitimate business reasons.
A key modern case that shaped tax law in this area is WT Ramsay Ltd v IRC (1981), which introduced the “Ramsay principle.” This allows courts to look beyond the legal form of a transaction to its substance, limiting artificial tax avoidance schemes. Later, Furniss v Dawson (1984) extended this approach, focusing on transactions lacking commercial purpose beyond reducing tax liability.
More recently, Barclays Mercantile Business Finance Ltd v Mawson (2004) refined the Ramsay principle by stating that it applies to artificial tax avoidance schemes, but not to genuine commercial transactions. This decision, along with cases like HMRC v PA Holdings Ltd (2011), has reinforced the idea that while taxpayers can minimise tax, there must be genuine commercial substance to the arrangements.
The Property118 models, such as the Substantial Incorporation Structure (SIS) and Capital Account Restructure (CAR), are grounded in addressing real commercial challenges, such as managing refinancing, protecting beneficial ownership, and ensuring long-term business viability. These structures are not about aggressive tax avoidance but are carefully crafted to balance tax efficiency with legitimate commercial objectives.
Reluctant Landlord
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Sign Up11:26 AM, 8th October 2024, About a month ago
Reply to the comment left by John Parkinson at 08/10/2024 - 11:02
unfortunately it's the bit "so far as he honestly can" which is the point of focus in all of this.
I'm no expert either, but like anything else if the rule maker doesn't make the rules TOTALLY clear then there is room for interpretation.
Loose rules work in HMRC's favour. Why would they openly need come out and say this is way is right or wrong, when uncertainty keeps people from moving to another structure (for fear of possible later financial reprisal) and keeps the existing tax rolling in?
The SIS & CAR system may be the tax saving answer if appropriate for you, but once you factor in all the associated costs involved in moving to establish this - is it really a cost saving long term?
And who do you pick to do the transfer etc for you? Are you really confident with who you use? It's a concern surely.
At the end of the day we are also at the whim of the government too who only every look at ways of increasing tax. If they don't get it out of you one way, they get it out of you another.
Mark Alexander - Founder of Property118
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Sign Up11:38 AM, 8th October 2024, About a month ago
Reply to the comment left by John Parkinson at 08/10/2024 - 11:02
The following is more case law in chronological order:
Lord Steyn in Inland Revenue Commissioners v Fitzwilliam [1993] STC 502:
"Tax planning is acceptable, provided the taxpayer does not frustrate the will of Parliament as reflected in the legislation."
This highlights the court’s stance that taxpayers may engage in tax planning as long as it respects the intended effect of tax statutes.
Lord Nolan in Inland Revenue Commissioners v Willoughby [1997] 1 WLR 1071:
"Tax avoidance, in the sense of a course of action designed to conflict with or defeat the evident intention of Parliament, is a cardinal sin in fiscal matters. But tax mitigation is not tax avoidance; it is legitimate."
Lord Nolan draws a clear distinction between legitimate tax mitigation and abusive tax avoidance.
Lord Templeman in Inland Revenue Commissioners v McGuckian [1997] 1 WLR 991:
"Fiscal nullity arises when there is a preordained series of transactions into which there are inserted steps that have no commercial purpose other than tax avoidance."
This case advanced the Ramsay principle, focusing on distinguishing genuine commercial transactions from those created solely for tax avoidance. However, it did not dismiss legitimate tax planning.
Lord Hoffman in MacNiven v Westmoreland Investments Ltd [2001] UKHL 6 (referencing the Ramsay principle):
"There is no judicial anti-avoidance doctrine which overrides the application of the statute."
This quote demonstrates the House of Lords’ interpretation that tax planning is permissible as long as it complies with statutory requirements, although it must be distinguished from artificial tax avoidance schemes.
Lord Walker in Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51:
"The hallmark of legitimate tax planning is that the taxpayer is merely taking advantage of a fiscally attractive option which Parliament has provided. On the other hand, tax avoidance typically involves taking steps that have no commercial purpose other than to secure a tax advantage."
This quote from Lord Walker supports legitimate tax planning while reinforcing the line between acceptable planning and abusive avoidance.
Lord Walker in Astrovale Holdings Ltd v Revenue and Customs Commissioners [2005] STC 543:
"There is no objection to tax planning, so long as it is carried out in a way that does not defeat the purpose of the legislation or rely on artificial or contrived arrangements."
Once again, Lord Walker distinguishes between legitimate tax planning and schemes that lack substance or commercial reality.
Lord Hope in Revenue and Customs Commissioners v Tower MCashback LLP 1 [2011] UKSC 19:
"The fact that a transaction is designed to give rise to a tax advantage does not of itself mean that it constitutes unacceptable tax avoidance. What matters is whether the transaction is one that Parliament intended to encourage."
Lord Hope here reiterates that tax planning is permissible if it aligns with Parliament’s intent, highlighting the difference between legal tax mitigation and avoidance.
Lord Neuberger in Pitt v Holt [2013] UKSC 26:
"The courts must be astute not to allow tax mitigation measures which fall outside the bounds of what Parliament intended, but at the same time, they must not penalise taxpayers for taking advantage of reliefs and allowances which Parliament has specifically made available."
Lord Neuberger emphasises that while taxpayers are entitled to use reliefs and allowances, they should not step beyond what the law allows.
Lord Carnwath in R (on the application of Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1:
"There is nothing wrong in taxpayers seeking to minimise their liabilities, but the line must be drawn where avoidance schemes distort the reality of transactions to achieve unintended tax results."
This statement underscores that tax planning is lawful, but schemes that distort or misrepresent transactions will not be upheld.
Lord Reed in HMRC v Murray Group Holdings Ltd [2015] UKSC 58 (concerning the Rangers FC Employee Benefit Trust scheme):
"Where an arrangement is contrived and artificial, having no genuine commercial purpose, it is likely to fall outside the boundaries of acceptable tax planning."
This highlights a shift in judicial thinking towards a more critical approach to artificial tax schemes, particularly those that lack substantive commercial purposes.
Lord Hodge in UBS AG v HMRC [2016] UKSC 13:
"The test is whether the transactions, viewed realistically, serve any purpose other than to reduce the taxpayer's liability to tax."
Lord Hodge advocates for a realistic assessment of transactions, suggesting that tax planning with no purpose beyond reducing tax liabilities will be subject to scrutiny.
These quotes reflect an evolving judicial attitude towards tax planning in the 21st century, with increasing emphasis on the need for commercial substance in tax planning arrangements and a clearer demarcation between legitimate planning and avoidance.
Mark Alexander - Founder of Property118
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Sign Up11:53 AM, 8th October 2024, About a month ago
Reply to the comment left by Reluctant Landlord at 08/10/2024 - 11:26
You raise valid points about the uncertainty surrounding tax rules and the concerns many landlords have when considering whether to restructure their property businesses. Let me address each of your points:
“So far as he honestly can”: This is indeed a critical aspect. Any tax planning, including the Substantial Incorporation Structure (SIS) and Capital Account Restructure (CAR), must be grounded in legitimate commercial purpose. HMRC focuses on whether the arrangements are commercially driven and compliant with both the letter and the spirit of the law. The key is to ensure that the restructuring is based on genuine business needs rather than being purely tax-motivated, which is why it's essential to work with experienced professionals who understand the intricacies of these models.
Loose Rules and HMRC's Approach: It’s true that some rules can seem open to interpretation, and HMRC does sometimes leave room for interpretation, which can lead to uncertainty. However, that is why the professional advice and support from experts familiar with these structures are so important. Properly implemented, SIS and CAR structures are based on sound legal and commercial principles, and many landlords have successfully adopted them. The uncertainty you mention is why Property118 ensures that clients receive tailored advice, ensuring that the structure is appropriate for their specific circumstances and compliant with current regulations.
Costs vs. Long-Term Savings: The costs associated with transitioning to an SIS or CAR model, including legal, accountancy, and refinancing fees, are legitimate considerations. However, the potential savings can outweigh these initial costs, especially if the structure enables better long-term tax planning and business management. These models are not just about short-term tax savings but about securing the future of your business. By protecting beneficial ownership and offering flexibility with refinancing, SIS and CAR can offer commercial advantages that make the initial costs worthwhile in the long term.
Choosing the Right Professionals: It’s natural to be concerned about who to trust with such an important process. This is why Property118 works with a network of highly experienced professionals, including legal and tax experts who specialise in property incorporations and restructuring. These professionals ensure that the process is managed properly, reducing the risk of errors and ensuring compliance with HMRC’s requirements.
Government Tax Policy: You’re right to point out that tax policy is subject to change, and governments do frequently look for ways to increase tax revenues. However, the SIS and CAR models are designed with commercial resilience in mind, helping landlords manage their portfolios effectively even as tax laws evolve. While no structure can be completely future-proof against government changes, these models provide flexibility and security in the face of shifting regulations.
Hugh Baily
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Sign Up16:25 PM, 9th October 2024, About a month ago
I wonder if S24 will be extended to Limited Companies in the forthcoming budget? It would seem to be a logical move to level the playing field although it doesn’t seem to have any press. If so, I suspect those who have incorporated with an existing portfolio will perhaps feel somewhat aggrieved and may not view the tax implications of ancillary importance.
Mark Alexander - Founder of Property118
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Sign Up17:00 PM, 9th October 2024, About a month ago
Reply to the comment left by Hugh Baily at 09/10/2024 - 16:25
How would you envisage that happening?
Section 24 provides a tax credit against finance costs to the rate of basic rate income tax. However, Limited Companies do not pay income tax. Instead, Limited Companies pay Corporation Tax.