Why experience matters when incorporating a property business
The Property118 incorporation model has probably undergone more scrutiny than any other landlord incorporation strategy in the United Kingdom. After years of HMRC investigations and a full 10-day First-tier Tribunal Appeal hearing, the Tribunal overturned HMRC’s allocation of Scheme Reference Numbers, resulting in the cancellation of those references and an associated Stop Notice.
As Property118’s incorporation work became more widely known, criticism inevitably followed. Some commentators alleged that we were promoting tax avoidance. Others described us as scheme promoters, cowboys, grifters, clowns and worse. HMRC allocated Scheme Reference Numbers to arrangements associated with our work and ultimately issued a Stop Notice.
Many observers assumed that Property118 would retreat, while others assumed that landlords who had followed our recommendations would be left to deal with the consequences alone, but that is not what happened.
For over two years, Property118 paused incorporation-based consultancy pending the outcome of the Tribunal process. Now that we have judicial clarity, we are open for incorporation-based consultancy again.
Standing behind our clients
When scrutiny intensified, Property118 faced a choice. We could attempt to distance ourselves from the arrangements and leave clients to defend themselves, or we could stand behind the guidance we had provided and support the landlords who had placed their trust in us.
We chose the latter.
We supported clients through HMRC enquiries, compliance checks and Discovery Assessments. We sought advice from leading barristers and King’s Counsel. We undertook legal challenges and ultimately defended our position before the First-tier Tribunal. The process was expensive, time-consuming and often stressful for everyone involved, but walking away was never an option that our integrity could even contemplate.
What the Tribunal decided
The First-tier Tribunal ultimately ruled that Property118’s activities did NOT breach the DOTAS regulations.
The significance of that decision extends beyond the immediate outcome, because it demonstrates that the simplistic narrative advanced by some critics did not withstand detailed legal scrutiny. It reinforces the distinction between promoting tax avoidance and helping landlords utilise statutory provisions that Parliament has deliberately enacted. It also highlights the value of practical experience in an area where commercial realities are often every bit as important as technical tax analysis.
Many people expressed opinions about landlord incorporations; Property118 was prepared to defend its position before a Tribunal.
There is a meaningful difference between commenting from the sidelines and standing behind clients when the consequences become real.
The tax outcomes the Tribunal recognised
The Tribunal did not seek to deny the existence of tax advantages associated with incorporation, or Property118’s recommended path to implementation. In fact, the Tribunal expressly identified a number of tax outcomes that may arise when a landlord transitions a property business into a limited company structure. These included:
- The ability to avoid the effects of the Section 24 finance cost restrictions, which apply to individuals and partnerships but not to companies.
- The ability for future business profits to be taxed at corporation tax rates rather than higher rates of income tax.
- The availability of Incorporation Relief under Section 162 TCGA 1992, enabling capital gains to be deferred when a qualifying business is transferred to a company.
- The ability for historic capital gains in the properties to be effectively rolled into the shares issued on incorporation, a consequence often referred to as “washing out gains” or “rebasing acqusition value”
- The preservation of Incorporation Relief that might otherwise have been restricted if refinancing had taken place at the point of incorporation.
- The ability for landlords to finance the extraction of their positive capital account balances prior to incorporation, without additional tax consequences.
The existence of these tax outcomes was not controversial. The Tribunal expressly recognised them when summarising the competing arguments before it.
Critics often presented these tax outcomes as though they were somehow unique to the Property118 incorporation model, but they are not.
Every one of these outcomes arises from legislation enacted by Parliament, HMRC concessions, or long-established principles of tax law. The Tribunal’s role was not to decide whether those tax outcomes existed. It was to determine whether the arrangements fell within the specific statutory tests required by the DOTAS legislation.
The Property118 Tax Tribunal ruling can be read here.
Why did the Tribunal conclude that DOTAS did not apply?
The DOTAS legislation does not say that any arrangement producing a tax advantage must be disclosed. If it did, routine business incorporations throughout the United Kingdom would potentially fall within the regime.
The Tribunal recognised that Parliament has deliberately enacted a range of statutory reliefs and exemptions designed to facilitate genuine business reorganisations. Incorporation Relief is one example, the treatment of SDLT for partnership incorporations is another. The ability for a company to deduct finance costs in full is simply a consequence of the corporation tax code enacted by Parliament.
The crucial question was therefore not whether tax advantages existed, but whether the arrangements fell within the specific descriptions and hallmarks prescribed by the DOTAS legislation.
Having considered the evidence in detail, the Tribunal concluded that HMRC’s allocation of Scheme Reference Numbers should be cancelled.
The Tribunal did not conclude that the Property118 incorporation model produced no tax advantages, it expressly recognised that it could. What the Tribunal did conclude was that the existence of those tax advantages did not, in the circumstances of this case, make the arrangements notifiable under the DOTAS regime. For landlords, that is an important because it reflects a principle that has existed throughout the UK tax system for decades. Parliament regularly creates reliefs, exemptions and alternative routes by which businesses can organise their affairs. Choosing to use legislation in the way Parliament intended is not the same thing as participating in a notifiable tax avoidance scheme.
The Tribunal proceedings contained thousands of pages of evidence and multiple barristers and King’s Counsel were involved. Both HMRC and the Tribunal scrutinised every aspect of the arrangements in extraordinary detail. The Court time alone was 10-full-days. Throughout that process, one thing became increasingly clear; the landlords who engaged Property118 were not primarily motivated by tax, they wanted to solve business problems.
Why experience matters most
There is no specific qualification that makes somebody an expert in landlord incorporations. No university degree, professional designation or regulatory licence can, on its own, equip an adviser with the breadth of knowledge required to guide landlords through what is often one of the most significant restructuring decisions of their business lives.
A solicitor may be an expert in company law, an accountant may specialise in taxation, and a mortgage broker may have extensive knowledge of lender criteria and refinancing options. However, incorporation sits at the point where all of these disciplines overlap, which is why experience often proves far more valuable than any individual qualification.
At Property118, we have always believed that practical outcomes matter more than professional labels. That belief has been shaped by helping more landlords incorporate their property businesses than any other company, assisting more landlords through HMRC compliance checks relating to incorporation than any other company, and successfully challenging more HMRC Discovery Assessments arising from landlord incorporations than any other company.
Those achievements were not acquired in a classroom; they were earned by helping real landlords solve real-world problems.
The majority of landlords who approached Property118 had spent many years, and often several decades, building substantial property businesses. They had accumulated significant equity, built up positive capital account balances and reached a point where their priorities were beginning to change. Retirement planning became increasingly important and succession planning started to move higher up the agenda. Many wanted to involve children in the future of the business without immediately surrendering control of everything they had spent a lifetime creating.
The difficulty was that conventional incorporation often created commercial challenges that few advisers were discussing. Landlords wanted to know how they could retain flexibility over wealth they had already accumulated. They wanted to understand how future refinancing might work. They wanted to separate historic capital from future business growth. They wanted to know how their children might eventually become involved and how the business could continue beyond their own lifetime.
These were not tax questions; they were business questions, and they deserved business solutions.
Why the Property118 landlord incorporation model was developed
The objective was never to create tax advantages that Parliament had not intended. The tax reliefs associated with incorporation already existed and were deliberately enacted to facilitate genuine business reorganisations. The challenge was making incorporation commercially workable for landlords whose circumstances were often more complex than those contemplated by traditional incorporation models.
At its heart, the Property118 incorporation model was built around flexibility.
It recognised that many landlords had accumulated substantial wealth before incorporation and wanted to preserve appropriate access to that wealth after incorporation. It recognised that positive capital account balances often represented decades of hard work, risk-taking and profits that had already been taxed. It recognised that retirement planning, succession planning, refinancing flexibility and long-term business continuity were frequently more important to landlords than achieving the lowest possible tax bill.
The objective was therefore to help landlords achieve the benefits of incorporation without unnecessarily sacrificing flexibility over historic capital. It also sought to avoid situations where refinancing at the point of incorporation could create unnecessary cost, complexity or even tax liabilities without generating any cash from which those liabilities could be paid. Deferring refinancing until there was a genuine commercial reason to undertake it gave landlords greater flexibility whilst preserving future options.
The Property118 incorporation model explained
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, the Property118 solution allows landlords to defer the immediate need for refinancing, thus avoiding the often insurmountable obstacle of finding a lender who will refinance and novate mortgages at the point of incorporation, plus deferring the substantial cost and hassle of arranging new mortgages until a more commercially advantageous time.
The Property118 model 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 and introduce significant risk to the process. By deferring this need, the method advocated by Property118 allows landlords to focus on smoothly transitioning their business to corporate ownership, before addressing refinancing.
This model mitigates the 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”.
“The transferor is not required to transfer business liabilities to the company but often does so. This is normally done in practice by the company giving the transferor an indemnity in respect of those liabilities.
In strictness, business liabilities taken over by the company represent additional consideration for the transfer and relief under TCGA92/S162 should be restricted. However, ESC/D32 enables any business liabilities taken over by the company to be ignored when quantifying `other consideration’ in recognition of the fact that the transferor is not receiving cash to meet any tax liabilities on the transfer and that the shares in the company are worth less than if the business had been transferred unfettered by liabilities.”
ESC/D32
Where liabilities are taken over by a company on the transfer of a business to the company, the Revenue are prepared for the purposes of the ‘rollover’ provision in TCGA 1992 s 162, not to treat such liabilities as consideration. If therefore the other conditions of s 162 are satisfied, no capital gain arises on the transfer. Relief under s 162 is not precluded by the fact that some or all of the liabilities of the business are not taken over by the company.”
The first element of the Property118 incorporation model is designed to protect landlords, not to circumvent tax obligations.
The second element is a commercial strategy designed to address liquidity and financing challenges that landlords face when incorporating their property businesses.
- Expert Advice from Simon’s Taxes B9:112: “If there is a substantial capital account in the unincorporated business, the business owner(s) should be advised to draw this down before incorporation. Otherwise, that capital will be locked into the value of the shares.” This extraction is crucial to avoid having capital trapped within the company structure, limiting access to it.
- Support from HMRC Manual BIM45700: HMRC’s guidance (BIM45700) states: “A proprietor of a business may withdraw the profits of the business and the capital they have introduced to the business, even though substitute funding then has to be provided by interest-bearing loans.” This confirms that withdrawing the capital before incorporation is legitimate, even if the company assumes responsibility for the borrowed funds.
Property118’s solution to these commercial problems:
- Pre-Incorporation Borrowing by the Unincorporated Business: Before incorporation, the unincorporated property business borrows money using bridging finance or another short-term loan. This provides the business with the necessary liquidity to enable the landlord to extract the positive balance from their capital account (which represents retained profits and capital injections) before the business transitions into a limited company. It is important to note that positive capital account balances will have previously been subjected to taxation, which is why the withdrawal is not taxed again.
- Company Assumes the Liabilities: Upon incorporation, the newly formed company assumes responsibility for the short term lending via an indemnity agreement. The company, rather than the individual, now holds the liability for repaying the loan.
- Support from HMRC Guidance CG65745: HMRC guidance CG65745 confirms that liabilities assumed by the company in the course of incorporation do not count as consideration for CGT purposes, provided the conditions for incorporation relief under TCGA 1992, Section 162 are met.
- Loaning the Cash Back to the Company: The former business owner, now a shareholder, loans the extracted capital back to the company. This is recorded in the company’s accounts as a shareholder’s loan. The company is likely to use these funds to pay short-term financing but may decide to take on longer-term financing to repay the short-term loans, leaving the company with extra working capital.
- Repayment of the Shareholder’s Loan: Over time, the company repays the shareholder’s loan. These repayments are tax-efficient because they represent the return of capital, not income or dividends, and therefore do not trigger personal tax liabilities for the shareholder.
Why landlords continue to choose Property118
The landlords who engage Property118 are rarely searching for a clever tax scheme. More often, they are searching for clarity.
They want confidence that the business they have spent years building will continue to to prosper and reassurance that their business can continue beyond their own involvement.
Successful incorporations begin with a clear understanding of what the landlord is trying to achieve. The tax consequences are important and should never be ignored, but the most successful outcomes are almost always driven by commercial objectives rather than taxation alone.
That philosophy continues to guide everything we do today.
