Is it legal to drive to Edinburgh?

This might seem like a strange question to ask on a forum for landlords, but there’s a good reason I’m bringing it up.

Some people might instinctively say, “Yes, of course, it’s legal to drive to Edinburgh.” But, as with most things, there are rules to follow.

For example, you must own the car or at least have the owner’s permission to drive it. You must be insured, have a valid driving licence, follow speed limits, and ensure the car is roadworthy. There are a lot of legal requirements before you can even think about setting off on your journey.

Tax planning works in much the same way.

You can make tax-efficient investments like ISAs or contribute to pensions to reduce your tax liabilities, but, again, there are rules you must follow. Each option comes with its own set of regulations.

If you’re a landlord, you have choices too—like whether to buy properties in your own name or through a limited company. You might even consider transferring your existing properties to a company at some point. But just as with driving to Edinburgh, making the wrong move could lead to some hefty penalties along the way.

What Happens When You Transfer Properties to a Company?

As a landlord, switching between ownership structures can trigger some costly taxes if not handled correctly. For example, if you decide to sell a couple of properties to your new company, you’ll need to reorganise your financing, pay Stamp Duty Land Tax (SDLT) on the purchase, and potentially face Capital Gains Tax (CGT) on the sale. It’s a bit like taking a wrong turn on the way to Edinburgh—it could be a costly mistake!

However, if you transfer your entire property business to a limited company in exchange for shares—and you meet the eligibility requirements for incorporation relief under Section 162 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992)—you might be able to roll your capital gains into shares instead of paying tax upfront. That’s like taking the scenic route, where you can enjoy the benefits without being hit with an immediate tax bill.

Even better, if your property rental business operates as an established partnership, your company might not need to pay SDLT either. The trick is to follow the right route, and just like when driving, having a guide who knows the rules is essential.

The Refinancing Trap

But the complexities don’t end there. You’ll also need to consider how you finance your company. This is where things get tricky and can feel like navigating a roundabout with no exit in sight.

If your company arranges new financing to purchase the properties, HMRC might argue that you’ve received cash as part of the deal and tax you on it. However, HMRC’s guidance is ambiguous on this point. Their manuals suggest that liabilities can be “taken over” by the company, and they also mention the concept of an “indemnity.” Yet, they don’t specifically mention how this applies to mortgages, which leaves landlords in a grey area.

The Chartered Institute of Taxation (CIOT) has raised concerns with HMRC about this ambiguity, asking for clearer guidance. The words “taken over” and “indemnity” might sound simple enough, but when it comes to mortgage liabilities during incorporation, the lack of clarity can cause confusion.

At Property118, we’ve always believed the HMRC guidance was clear, particularly in cases like these. However, HMRC has recently accused Property118 of promoting tax avoidance—an allegation we strongly refute. We believe we’ve been navigating these waters responsibly and within the law.

The Importance of Expert Guidance

To help landlords understand the right path, Simon’s Taxes, a trusted tax reference guide, explains this refinancing issue in detail. At B9:114, it states:

“The incorporation of a buy-to-let property business may involve refinancing the existing mortgages, which could possibly prevent HMRC from 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, there is considerable risk that HMRC might choose not to apply its concession.”

This means that if your company doesn’t take on the existing mortgage liabilities directly—using an indemnity, for example—HMRC may decide not to apply the Extra-Statutory Concession (ESC D32). Without this concession, you could end up with an immediate CGT bill.

ESC D32 allows liabilities like mortgages, assumed by the company, to be ignored for CGT purposes. This is crucial for landlords incorporating their property businesses, as it means you won’t incur an immediate CGT liability just for transferring your properties to a company. But mishandling the financing could prevent HMRC from applying this concession.

The Problem? Uncertainty

The biggest challenge landlords face right now is uncertainty. How can you plan your business’s future when HMRC’s guidance is unclear? Without certainty, landlords are left in a difficult position, unsure whether their incorporation plans will land them with an unexpected tax bill. This lack of clarity is, in our opinion, unfair.

The Solution? Dialogue and Defence

We’re hopeful that ongoing dialogue between Property118, the CIOT, and HMRC will bring much-needed clarity. In fact, we’re in talks to arrange a meeting with HMRC soon to discuss these issues.

If it becomes necessary, we’re fully prepared to defend our clients’ interests before the First-Tier Tribunal (FTT). We will present a robust case, demonstrating the commercial legitimacy of the strategies we’ve recommended. Landlords should not be punished for using reasonable and lawful strategies to manage their tax liabilities.

Help Us Fight Back

If you believe HMRC’s actions are unfair, you can help us stand up for your rights. Together, we can push back and ensure that landlords across the UK can continue to manage their businesses confidently and within the law.

With your help, we can defend the rights of landlords everywhere.

Visit our JustGiving page. Together, we can make a real difference.

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