Refinanced at incorporation? Your adviser may need to notify their PI insurer

Many landlords were told that replacing their personal or partnership mortgages with new borrowing in their company’s name was the orthodox way to incorporate. The recent Property118 Tribunal judgment has now placed a serious question over whether full Incorporation Relief was available in every one of those cases.

The possible consequence is not a technical footnote. Where the company’s new borrowing was used to redeem the landlords’ existing debts, HMRC could argue that the company replaced those liabilities rather than taking them over. If that analysis is correct, Extra-Statutory Concession D32 may not protect the refinancing and part of the gain that was believed to have been deferred could have become chargeable when the business was incorporated.

That could leave affected landlords facing Capital Gains Tax and interest on a transaction which was designed, documented and implemented by professional advisers. It also raises an urgent question for the accountants, tax advisers, solicitors, incorporation providers, mortgage brokers and, in some cases, lenders involved in those transactions.

What the Property118 judgment actually found

The Property118 DOTAS appeal was heard over ten days, from 2 to 13 February 2026. The First-tier Tribunal released its decision on 31 July 2026, allowed the appeals and cancelled the Scheme Reference Numbers imposed by HMRC. The case concerned whether the arrangements were notifiable under the Disclosure of Tax Avoidance Schemes rules; it did not decide the final Capital Gains Tax position of any individual landlord.

Nevertheless, the Tribunal could not decide the DOTAS appeal without comparing the Property118 incorporation model with an incorporation in which the existing mortgages were dealt with through refinancing, novation or another arrangement. At paragraph 151 of the official judgment, it concluded that the Property118 model:

“enables him to obtain IR in full which he may not be able to obtain if there was a refinancing.”

That finding does not mean that every landlord who refinanced owes tax. Each case turns on its own agreements, indemnities, loan documentation, completion statements and movement of money. Paragraph 196 of the judgment also records that the DOTAS proceedings were separate from the individual tax investigations and assessments affecting some of the witnesses.

A First-tier Tribunal decision does not bind another Tribunal considering a different landlord’s facts. It is nevertheless a published judicial analysis reached after ten days of evidence and cross-examination, and it gives HMRC, advisers and affected landlords a clear reason to examine refinancing cases properly.

What the finding does establish is that immediate company refinancing and preserving or taking over the existing business liabilities are not automatically tax-equivalent. The distinction is real, it was central to the Tribunal’s reasoning and professional advisers can no longer safely treat it as irrelevant. Property118 examined the wider implications in our earlier article, Did tax advisers, lawyers and lenders get landlord incorporation wrong?

ESC D32 explained in plain English

Section 162 of the Taxation of Chargeable Gains Act 1992 can defer Capital Gains Tax when a qualifying business is transferred to a company as a going concern, together with its assets, wholly or partly in exchange for shares. The gain is broadly rolled into the shares rather than being taxed immediately.

Where the former business owner receives something other than shares, however, only the proportion of the aggregate gain attributable to the shares is deferred. The proportion attributable to other consideration becomes chargeable in the tax year of incorporation. HMRC explains the calculation in Capital Gains Manual CG65740.

Business liabilities create a technical problem. If a company takes over a liability, the former owner has been relieved of that obligation. In strictness, that is additional consideration and Incorporation Relief should be restricted. Extra-Statutory Concession D32 can prevent that result by allowing qualifying business liabilities taken over by the company to be ignored when the non-share consideration is measured.

HMRC’s current CG65745 guidance says that the transfer of liabilities is normally dealt with by the company giving the transferor an indemnity. The critical words in the concession are “taken over”.

The fact that the figures match does not make the liabilities identical. A new £1 million company loan does not automatically become the old £1 million partnership mortgage merely because the amounts are the same. The borrower, lender, contractual obligation, security, completion mechanics and flow of funds all matter.

Nor does the money have to pass through the landlord’s personal current account. If the company’s new borrowing went through solicitors’ completion accounts directly to the old lenders, the landlord may still have received the legal and economic benefit of the old debts being discharged.

Equally, the existence of new company borrowing does not prove that the tax treatment was wrong. There may have been an effective novation, indemnity or other arrangement which changes the analysis, or the adviser may already have restricted the relief and reported the resulting gain. That is why affected transactions need to be reviewed from the documents rather than judged from a mortgage statement alone.

The warning was already in professional tax commentary

The refinancing risk was not invented during the Property118 litigation. Simon’s Taxes B9.114 had already warned that where a company did not assume the same liabilities but raised its own finance and passed it to the transferor to settle the property debts, there was a “considerable risk” that HMRC would decline to apply ESC D32. The warning is reproduced at paragraphs 56 to 58 of the Tribunal judgment.

The Chartered Institute of Taxation raised the same concern with HMRC in 2024. It explained that modern lenders rarely permit an existing loan to be novated from an individual or partnership to a company. More commonly, the lender requires a new company loan and the new borrowing is used to repay the old debt. The CIOT said it was unclear whether ESC D32 applied in those circumstances and asked HMRC for clearer guidance.

The evidence recorded from the ten-day Property118 hearing makes that professional uncertainty more troubling. HMRC’s witness accepted that the concern in Simon’s Taxes was valid, thought HMRC would not apply ESC D32 to the refinancing scenario under discussion and acknowledged that there had been considerable professional concern about the point. He also said that he had become aware of the issue and HMRC’s proposed guidance update through the Property118 case rather than through his earlier work.

The evidence from advisers was equally revealing. Some understood that refinancing at incorporation could jeopardise full Incorporation Relief, while others involved in advising property incorporations were not familiar with the point. If experienced professionals had not identified the distinction, their landlord clients could hardly have been expected to identify it for themselves.

Why immediate refinancing could be commercially sub-optimal as well

The hearing demonstrated that this was never simply a tax argument. Forcing an entire portfolio through new company finance on one particular completion date could destroy commercial value through early repayment charges, new lender fees, fresh valuations, legal costs, lost offset arrangements, higher company mortgage rates and the administrative disruption of refinancing many properties at once.

• One adviser described a client with 33 properties and five lenders whose estimated refinancing costs were between £150,000 and £200,000, before allowing for any increase in interest rates.
• Another landlord with 35 mortgages estimated that maintaining the same level of borrowing would have cost about £100,000, together with more than 100 hours of additional work.
• A further landlord faced early repayment charges of more than £66,000 on just six mortgages.

Those figures are recorded in the published judgment. Other witnesses described cladding problems, lenders which would not offer novation, favourable fixed rates they wanted to retain and portfolios which would have been extremely difficult to refinance simultaneously.

The Tribunal found that landlords using the relevant features of the Property118 model had two main reasons for doing so: preserving full Incorporation Relief and avoiding immediate refinancing for genuine non-tax reasons. The importance of each reason differed from client to client, which is exactly why the decision should have been led by the landlord’s commercial objectives rather than by a predetermined conveyancing or mortgage process.

Immediate refinancing is not always wrong. A landlord may actively want new company borrowing to secure a longer fixed rate, reorganise security, release capital or move to a lender better suited to the future business. The problem arises where refinancing was treated as the default route without comparing the commercial and tax consequences of preserving the existing liabilities, using a genuine novation or indemnity, refinancing gradually, accepting a properly calculated restriction of relief, delaying incorporation or deciding not to incorporate at all.

Which landlords should obtain an urgent review?

The highest-risk cases are likely to be those in which most or all of the following occurred:

• A personally owned or partnership property business was transferred to a company.
• The existing personal or partnership mortgages were redeemed on or around the incorporation date.
• New borrowing in the company’s name funded those redemptions, whether the money moved directly to the old lenders or through solicitors’ accounts.
• Full section 162 Incorporation Relief was applied and little or no Capital Gains Tax was reported.
• There was no genuine novation or substitution of the existing debt.
• The file contains no clear explanation of how ESC D32 applied to the replacement finance.
• The landlord was told that refinancing into the company was the normal, safest or necessary way to complete the incorporation.

The presence of those indicators does not establish that tax is payable. It means that the financing documents, business sale agreement, indemnities, share consideration, tax calculations and flow of money should be examined by an independent specialist.

A later refinance can be materially different. Where the company refinanced months or years after incorporation because a fixed-rate period had ended, better terms became available or the landlord made a new commercial decision, that may not form part of the original incorporation transaction. Timing alone is not conclusive, however. A refinance which was contractually committed or pre-arranged from the outset may still need to be considered as part of the transaction viewed as a whole.

What could the Capital Gains Tax exposure look like?

A restriction does not normally mean that the entire amount refinanced becomes a capital gain. The calculation establishes what proportion of the aggregate gain is attributable to shares and what proportion is attributable to other consideration.

Real calculations can be considerably more complicated. They may involve different ownership percentages, multiple share classes, capital losses, valuations, principal private residence relief, non-resident rebasing and other individual factors. A landlord should not estimate the position simply by applying a Capital Gains Tax rate to the amount of the new mortgage.

Landlords should also not assume that their file will contain a document headed “ESC D32 claim”. For transfers before 6 April 2026, Incorporation Relief generally applied automatically where the statutory conditions were satisfied, so the relevant assumption may be buried in the Capital Gains Tax workings, tax return file or completion report. For transfers on or after 6 April 2026, Finance Act 2026 requires a claim, and HMRC says the transferor must provide transaction details and computations through the Self Assessment return.

Could HMRC now review historic incorporations?

Nobody outside HMRC can say whether it will launch a wider review. The Tribunal did not direct HMRC to investigate landlords advised by other providers, and the judgment did not determine that any particular refinancing failed to qualify for full relief.

The issue is now, however, set out in a published judicial decision. The judgment records the Simon’s Taxes warning, the CIOT’s concerns, HMRC’s own view of the refinancing scenario and evidence that not every professional adviser had understood the point. It is therefore reasonable for landlords and advisers to consider the possibility that HMRC may examine historic cases in which immediate company refinancing and full relief appeared together.

HMRC’s policy direction also points towards closer scrutiny. For transfers from 6 April 2026, its new Incorporation Relief claims process requires transaction details and tax computations. HMRC says the purpose is to improve its data and enable better targeting of compliance resources.

Whether HMRC can assess an older transaction depends on the tax year, what was reported or disclosed, whether an enquiry remains open and the applicable statutory time limit. HMRC’s published guidance on assessment time limits includes a normal four-year period and a six-year period where tax was lost through carelessness, with longer periods applying in particular circumstances.

Why lenders and mortgage brokers need to pay attention

Mortgage lenders and brokers are not ordinarily appointed to decide whether a landlord qualifies for section 162 Incorporation Relief. Arranging a conventional company mortgage does not, by itself, amount to negligence, and this article should not be read as an accusation against every finance professional connected with an incorporation.

The financing they arrange can nevertheless determine the legal and tax character of the consideration received. The Chartered Institute of Taxation identified the practical problem clearly: lenders now rarely permit a personal or partnership loan to be novated to a company and usually require a new company facility to repay the old borrowing. That may be normal banking practice, but it does not follow that the two transactions are tax-equivalent.

The position may require closer examination where a lender, broker, network or introducer participated in a packaged incorporation and refinancing proposition, made representations about a “no CGT” outcome, described immediate company refinancing as compulsory or worked within a formal referral or co-marketing arrangement with the incorporation provider.

Lenders and brokers connected with historic transactions should consider preserving and reviewing:

• The instructions and professional advice which led to the refinancing application.
• Any statement that all existing mortgages had to be replaced at incorporation.
• Promotional material referring to Incorporation Relief, Capital Gains Tax or tax neutrality.
• Whether novation, transfer of borrower, indemnity or phased refinancing was considered.
• Any introducer agreements, packaged-service arrangements or shared marketing.
• The agreed division of responsibility between the broker, lender, accountant, tax adviser, solicitor and incorporation provider.

Even where no legal liability rests with the finance professionals, an unexpected Capital Gains Tax assessment could damage a customer’s liquidity, affect future refinancing and create significant reputational concerns. There may also be a product-development opportunity for lenders willing to create properly underwritten routes for novation, substitution or phased refinancing rather than forcing an entire portfolio through new finance on one arbitrary date.

What affected landlords should do now

1. Preserve the complete transaction file. Retain engagement letters, advice reports, emails, meeting notes, recordings, Capital Gains Tax calculations, tax returns, business sale agreements, declarations of trust, indemnities, board minutes, share documents, old mortgage statements, redemption statements, new loan agreements, solicitors’ completion statements and bank records.
2. Obtain an independent tax review. The reviewer should have genuine experience of section 162, ESC D32 and property business incorporations. The original adviser should be invited to explain the calculation, but should not be the only person deciding whether their own work was correct.
3. Contact the original advisers in writing. Ask them to preserve their complete file and explain precisely which liabilities the company took over, whether there was a novation or indemnity, how the replacement finance was treated and why full ESC D32 treatment was considered appropriate.
4. Ask for professional indemnity notification. Ask the adviser to notify its professional indemnity insurer of circumstances which may lead to a claim and to confirm in writing that notification has been made. Notification is not an admission that negligence occurred.
5. Seek urgent independent professional negligence advice. A specialist solicitor should consider the professional retainers, duties undertaken, technical standard of the advice, causation, recoverable loss, insurance and limitation. Property118 does not provide this advice.
6. Coordinate the tax and negligence strategies. Correspondence with HMRC may affect the potential claim against the advisers, while allegations made against the advisers may affect the handling of the tax dispute. Neither should be managed in isolation.

Why professional indemnity notification matters

Professional indemnity insurance commonly operates on a claims-made basis. Broadly, the relevant policy is often the policy in force when a claim is asserted or when circumstances which may lead to a claim are notified, rather than necessarily the policy in force when the original advice was given. The Solicitors Regulation Authority and ICAEW provide guidance on professional indemnity cover.

The Professional Negligence Pre-Action Protocol for England and Wales says that once a claimant considers there is a reasonable chance of bringing a claim, the professional should be notified in writing. The preliminary notice should outline the grievance and ask the professional to inform its professional indemnity insurers immediately.

That does not mean landlords should send an angry or speculative accusation without advice. The wording and timing should preferably be considered by an independent professional negligence solicitor. A carefully framed notification can preserve the position without asserting that liability has already been established.

In England and Wales, professional negligence claims commonly involve six-year limitation periods in contract or tort. Section 14A of the Limitation Act 1980 may provide a later three-year period based on the claimant’s knowledge, subject to the longstop in section 14B. The calculation is highly fact-sensitive.

The House of Lords decision in Haward v Fawcetts demonstrates why a landlord should not assume that time only begins to run when HMRC issues a final assessment or when the landlord becomes certain that the original advice was wrong. Knowledge sufficient to make it reasonable to investigate the advice may be enough. Different limitation and procedural rules apply in Scotland and Northern Ireland, so local advice is essential.

A possible tax assessment does not automatically prove negligence

An adverse tax conclusion and a successful professional negligence claim are not the same thing. A claim will normally require proof of a relevant professional duty, breach of that duty, causation and recoverable loss. It will also be necessary to consider the purpose for which the advice was given and the risk against which the professional undertook to protect the client.

The central practical question is likely to be: what would the landlord probably have done if the refinancing risk had been explained correctly? They might have preserved the existing mortgages, used an effective indemnity or novation, refinanced gradually, accepted a correctly calculated restriction, delayed incorporation or decided not to incorporate at all.

The landlord should have been shown the realistic alternatives, their commercial costs and their legal and tax consequences, and then allowed to make an informed decision. An adviser’s position may be very different where the risk was fully explained and the landlord consciously selected immediate refinancing from a range of options.

The recoverable loss will not necessarily equal the entire tax assessment. The Supreme Court confirmed in Manchester Building Society v Grant Thornton UK LLP that the scope of a professional’s duty is governed by the purpose of the advice. Tax which would always have been payable may not represent recoverable damage, while interest, penalties, wasted fees, unnecessary refinancing costs and other losses may require separate analysis.

Responsibility may also have been divided between several professionals. The accountant may have prepared the tax computation, the tax specialist may have advised on section 162, the solicitor may have controlled the completion mechanics, the incorporation provider may have coordinated the transaction and the mortgage broker may have arranged the replacement finance. An independent solicitor will need to establish who undertook which responsibility rather than assuming that everybody involved is liable, or that nobody is.

What professional firms should consider doing now

Firms which advised landlords to replace existing mortgages with new company borrowing while applying full Incorporation Relief should not wait passively for an HMRC enquiry or client complaint. Accountants, tax advisers, solicitors and incorporation providers may need to undertake a legally privileged review of relevant files, identify the technical basis on which ESC D32 was applied, check whether the refinancing risk was disclosed and obtain advice on their professional indemnity notification obligations.

Saying that immediate refinancing was normal market practice is not, by itself, an answer. A firm should be able to explain why the old liabilities were regarded as having been taken over, why the new borrowing was not other consideration and what alternative routes were discussed with the client.

Firms may also need to consider whether former clients should be alerted. That decision should be taken with specialist legal and insurance advice, particularly where correspondence could amount to an admission or affect policy coverage. Mortgage brokers and lenders involved in packaged propositions should review their own historical representations, instructions and referral arrangements, even where they were not retained to give tax advice.

Still considering incorporation? Start with the commercial plan

The lesson is not that incorporation should be avoided or that company borrowing is inherently wrong. The lesson is that the landlord’s commercial objectives must be understood before anybody selects the legal structure, financing route or tax treatment.

Is the priority business continuity, succession planning, liability management, retirement, cash flow, retaining existing mortgage terms, refinancing flexibility, raising further capital or enabling future generations to participate in the business? Only after those objectives are established should the alternative structures, commercial costs, legal risks and positive tax outcomes be compared. The mortgage product should support the plan rather than dictate it.

Property118’s position

Property118 does not advise on professional negligence. We do not determine whether a claim exists, identify defendants, value losses, advise on limitation, draft preliminary notices or conduct claims against professional advisers or their insurers. Our consultation service is for landlords considering their commercial and structural options; it is not a professional negligence review.

This article provides general information only. It is not tax, legal, mortgage, insurance or professional negligence advice. We are not suggesting that every incorporation involving company borrowing failed to qualify for full Incorporation Relief, nor are we attacking the landlords who relied on the professionals they appointed.

We are warning that where old personal or partnership mortgages were replaced with new company finance at incorporation, full relief should not have been assumed without a rigorous and properly documented ESC D32 analysis.

The landlords did what they were told. The danger is that a routine-looking refinancing step may have been treated as tax-neutral when it was not. The right time to find out is now, before HMRC writes to the landlord and before any possible claim against the professionals runs out of time.