Property118 incorporation models – Rebuttal of Tax Avoidance Allegations

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.

Legal Foundation: Gordon vs IRC and the Transfer of Beneficial Interest

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.

Commercial Drivers for SIS in Landlord Incorporations

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.

Main Reasons Landlords Incorporate

1. Business Continuity and Legacy Planning

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:

• Ensure Business Longevity: By transitioning from personal ownership to a corporate entity, landlords create a stable legal structure that can outlive their personal involvement, ensuring the property business can continue operating without disruption.
• Facilitate Succession Planning: Incorporation allows for easier transfer of ownership to heirs or other stakeholders, whether gradually or in one transaction. A corporate structure provides clarity and efficiency in managing inheritance and succession, avoiding the complexities and tax inefficiencies that may arise from passing down individual properties.
• Simplify Estate Management: With incorporation, landlords can set up shareholding structures that reflect their long-term intentions, allowing different family members or business partners to take on roles within the company. This makes it easier to plan for the next generation without burdening the estate with fragmented property ownership.

2. Navigating Section 24 Finance Restrictions

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.

3. Overcoming Financing Challenges

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:

• No Immediate Need to Refinance: Landlords can defer refinancing to a time that is more commercially suitable, avoiding penalties, fees, or rushed negotiations that might arise from trying to novate mortgages during incorporation.
• Legal Protection for Lenders: The LPA 1925 ensures that the lender’s security interest remains fully protected during this phase. Since the legal title to the property remains with the original borrower (the landlord), the lender’s charge continues to be valid. There is no need for lenders to consent to a transfer of the beneficial interest, as their security remains tied to the legal ownership, which does not change during the incorporation process.
• Flexibility in Lender Engagement: The structure allows landlords to engage with lenders at a later stage when the corporate entity is better established, improving their chances of securing favourable terms. This can help landlords avoid early repayment charges or fees that could result from refinancing prematurely.
• Minimising Disruption: Incorporating a property business is already a complex process, and adding the requirement to refinance all existing loans simultaneously can create unnecessary operational burdens. By deferring this need, SIS allows landlords to focus on smoothly transitioning their business to corporate ownership before addressing refinancing.

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.

ESC D32 Risk Mitigation

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.

Substance Over Form: Legal and Commercial Realities

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.

Addressing Misunderstandings and Defending Our Clients

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.

Compliance with DOTAS Requirements

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.

HMRC’s Adoption of Dan Neidle’s Critique

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.

To summarise

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.

Help Us Fight Back

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.

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