HMRC’s Classification of Substantial Incorporation Structure (SIS) and Capital Account Restructure (CAR): Clarifying the Situation

Recent developments have led HMRC to name Property118’s Substantial Incorporation Structure (SIS) and Capital Account Restructure (CAR) as tax avoidance schemes. We strongly disagree with this classification and believe that both structures are fully compliant with UK tax law.

However, given the ongoing dispute and the issuance of a Stop Notice for CAR by HMRC, it’s important to clarify that we are not promoting the use of SIS or CAR at this time. This article aims to clarify the commercial and legal motivations behind these structures and provide context on why they have been widely used in the past.

Substantial Incorporation Structure (SIS)

SIS was developed to help landlords incorporate their property businesses in a commercially viable manner, without triggering significant financial penalties such as early mortgage redemption fees or costly new mortgage arrangements. One of the primary obstacles for landlords when transferring their property portfolios into a limited company was the difficulty in novating mortgages. Many lenders either did not offer novation or imposed unfavourable terms.

SIS provided a practical solution by allowing landlords to transfer the beneficial interest of their properties to the company while retaining legal ownership in their personal names, deferring the need for immediate refinancing. This flexibility enabled landlords to avoid incurring early redemption penalties and spreading the refinancing process over a more commercially advantageous timeline.

Historically, SIS helped many landlords manage their businesses more effectively and reduce the risks associated with immediate and costly refinancing, while preserving the ability to continue operating without disruption. The structure allowed business continuity and succession planning, making it an ideal solution for landlords looking to grow their businesses, manage liabilities, and involve family members or partners in the ownership structure.

Capital Account Restructure (CAR)

CAR was designed to provide liquidity to property businesses by utilising bridging finance, allowing landlords to extract their positive capital account balances from the business prior to incorporation without creating a tax liability. This capital represented the original investments made by the landlords as well as any accumulated profits already subjected to taxation. The CAR structure allowed landlords to unlock their own capital (already taxed) which they had tied up in their businesses.

By facilitating a temporary bridging loan, CAR gave landlords access to much-needed liquidity during the incorporation process. After the incorporation, landlords could continue operating their businesses through the company while managing their liabilities more flexibly.

The primary motivation for CAR was to allow landlords to manage their capital effectively during the transition from personal to corporate ownership. Like SIS, CAR was commercially driven, helping landlords plan for business continuity, growth, and succession while ensuring the business had access to sufficient liquidity.

Acknowledgement of the Stop Notice: We recognise that HMRC has issued a Stop Notice regarding CAR. Until the current legal dispute is resolved, we are not promoting or encouraging the use of SIS or CAR for any new incorporations.

HMRC has named both SIS and CAR under its recent in its recent update of Tax Avoidance Scheme publications, and therefore, we are not recommending the use of either of these structures at this time. Our focus is on challenging HMRC’s classification of these structures as avoidance schemes, and we are committed to defending the legitimacy of both SIS and CAR in the appropriate legal forum.

Commercial, Not Tax-Driven, Benefits

Both SIS and CAR were always designed with commercial goals in mind, particularly helping landlords manage liabilities, plan for succession, and ensure the long-term viability of their businesses. Any tax reliefs obtained by using these structures were incidental to their core purpose of allowing businesses to operate effectively and sustainably.

Legal Disclaimer

It is important to note that we are not promoting SIS or CAR for future use until the legal matters with HMRC have been resolved. We continue to challenge HMRC’s position and remain confident in the legal standing of the structures we have previously recommended.

Next Steps

While this legal process unfolds, we remain committed to supporting our clients, answering any questions they have, and defending the legitimate commercial and legal uses of these structures.

We urge clients to reach out if they have any concerns or need clarification regarding their own situations.

Disclaimer: This article is for informational purposes only. Property118 is not currently promoting or recommending the use of SIS or CAR until the legal issues with HMRC have been resolved.

Please consult your own professional advisors for personalised tax or legal advice.

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