Landlords could face unexpected tax bills after following professional advice

7:25 AM, 21st August 2026, 2 hours ago

Landlords who transferred their property businesses into companies could face unexpected Capital Gains Tax bills after following what was widely presented as the conventional incorporation process.

The warning concerns landlords whose personal or partnership mortgages were repaid using new borrowing taken out by their companies at the time of incorporation.

For many years, landlords were commonly told that this was the orthodox way to move a mortgaged property portfolio into a limited company. Accountants, tax advisers, solicitors, incorporation providers and mortgage brokers were often involved in designing and completing the transactions.

A recent First-tier Tribunal judgment has now highlighted a potential problem with the tax treatment.

The technical issue in plain English

Incorporation Relief can postpone Capital Gains Tax when a business is transferred to a company in return for shares.

Special HMRC treatment known as ESC D32 can also allow existing business debts taken over by the company to be ignored when calculating the relief.

The problem is that taking over an existing mortgage may not be the same as repaying that mortgage with a completely new company loan.

Although the financial result may appear similar, the legal and tax treatment can be different. If the old mortgage was replaced rather than taken over, HMRC could argue that part of the incorporation was funded with something other than shares. That could restrict the tax relief and leave part of the property gain taxable from the date of incorporation.

What the Tribunal said

The Tribunal case involved Property118 and Cotswold Barristers successfully challenging Scheme Reference Numbers imposed by HMRC under the Disclosure of Tax Avoidance Schemes rules.

The Tribunal cancelled the Scheme Reference Numbers. It did not decide the final tax liability of any individual landlord.

However, when comparing the Property118 incorporation model with immediate refinancing, the Tribunal said the model enabled a landlord to obtain Incorporation Relief in full, which they “may not be able to obtain if there was a refinancing”.

That carefully worded finding does not mean every landlord who refinanced now owes tax. It does mean that advisers can no longer safely assume that repaying old mortgages with new company borrowing was automatically tax-neutral.

Property118 founder Mark Alexander said:

“Normal banking practice is not automatically tax-neutral. Paying off an old personal mortgage with a new company loan is not necessarily the same as the company taking over the existing debt.

“The landlords involved did what responsible business owners are supposed to do. They appointed professional advisers, disclosed their mortgages and followed the completion plan they were given. They should not now be expected to identify a technical risk that their advisers may not have explained to them.

“This is not an allegation that every refinancing failed or that every adviser was negligent. The urgent question is whether full Incorporation Relief was claimed without a properly reasoned analysis and whether the landlord was clearly warned about the risk.”

Which landlords may be affected?

A transaction may require review where:

* A personally owned or partnership property business was transferred to a company.

* The existing mortgages were repaid at or around the incorporation date.

* New company borrowing funded those repayments.

* Full Incorporation Relief was claimed, leaving little or no immediate Capital Gains Tax.

* The professional file does not clearly explain why the new financing qualified for the relevant HMRC treatment.

The presence of these features does not prove that tax is payable. The contracts, mortgage documents, tax calculations and movement of money must be examined in each case.

Why advisers’ insurers may become involved

Where there is a reasonable possibility of a claim, professional firms may be required to notify their professional indemnity insurers.

Notification is a precautionary measure. It is not an admission that the adviser was negligent or that the landlord has suffered a recoverable loss.

However, affected firms may need to review historic files now rather than wait for HMRC to open enquiries or for former clients to complain.

Landlords who believe they may be affected should obtain independent specialist tax and legal guidance before amending tax returns, accepting that tax is payable or making allegations against their original advisers.

The full Property118 analysis is available at:

Refinanced at incorporation? Your adviser may need to notify their PI insurer