Property118 incorporation models – Rebuttal of Tax Avoidance Allegations

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

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

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".

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

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.

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.

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.

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.

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.

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.