Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Solutions. Read the original article for full details.

Property118 Wins Tribunal Appeal Over HMRC Landlord Incorporation Notices

Property118 has won a First-tier Tribunal appeal against HMRC concerning the tax authority’s decision to allocate Scheme Reference Numbers and issue a Stop Notice related to its landlord incorporation model. As a result of the tribunal's ruling, DOTAS (Disclosure of Tax Avoidance Schemes) labels attached to the arrangements have been removed.

The litigation focused on the Substantial Incorporation Structure (SIS), which was marketed to professional landlords considering transferring personally held property portfolios into corporate structures. The tribunal noted that incorporation has become more common among professional landlords, citing factors such as improved lending affordability calculations for corporate borrowers and increased attention to continuity and succession planning among older landlords.

HMRC had questioned whether the arrangements were designed to work around Section 24, which restricts the deductibility of finance costs for individual landlords. The tribunal referred to evidence from the Office of Tax Simplification (OTS), which found that landlords were often driven to incorporate for tax reasons, mainly due to the restriction on interest relief and the lower rate of corporation tax compared with higher and additional rates of income tax. The OTS also recorded that retaining profits inside a company can result in a lower effective tax rate than holding property personally.

The tribunal heard that landlords had a range of commercial reasons for pursuing incorporation, including preserving competitive mortgages, dealing with cladding issues, early repayment charges, complex portfolios across multiple lenders, and significant refinancing costs. The tribunal also noted that tax was one part of a wider commercial decision for landlords.

Howard Reuben, principal and founder of HD Consultants, commented that HMRC may appeal the decision. He also noted that the tax strategies promoted by Property118 were implemented by Cotswolds Barristers, and the tribunal did not concede that the underlying tax planning from Cotswolds Barristers is robust. Reuben described the ruling as a first step win for Property118 but said many lenders have indicated there is no change in their lending decisions at this stage.

This case is relevant for letting agents and inventory clerks as it highlights ongoing developments in landlord incorporation and the regulatory environment affecting professional landlords.