Editor's note: This brief was summarised by The Property AI Newsroom from a report by Property118. Read the original article for full details.

Tribunal Confirms Refinancing Can Jeopardise Landlord Incorporation Relief

A First-tier Tribunal has confirmed that refinancing at the point of incorporation can jeopardise full Incorporation Relief for landlords. The Tribunal also found that the Property118 Substantial Incorporation Structure (SIS) avoids this risk.

The Tribunal judgment highlighted a technical issue in the conventional approach used by many tax advisers, lawyers, and lenders when incorporating mortgaged property businesses. For years, the standard practice has been to transfer properties into a company and replace existing personal mortgages with new company borrowing at completion. This method has been widely presented as the orthodox or safest way to incorporate.

However, the Tribunal confirmed that this conventional refinancing process is not tax-equivalent to the SIS recommended by Property118. According to the published judgment, SIS “enables a person to obtain a tax advantage in that it enables him to obtain IR in full.” The judgment explains that full Incorporation Relief might not be obtained where refinancing takes place at the point of incorporation.

The Tribunal also confirmed that other tax consequences identified by HMRC were simply the ordinary results of incorporating a property business, not additional advantages created by SIS. Importantly, the Tribunal rejected HMRC’s argument that obtaining the Incorporation Relief advantage was the main purpose of SIS.

The risk associated with refinancing was previously highlighted in Simon’s Taxes, a leading professional reference for accountants and legal professionals. Simon’s Taxes warned that if a company raises its own finance and passes the proceeds to the transferor to repay existing debts, there is a considerable risk that HMRC will decline to apply Extra-Statutory Concession D32. The reference recommended that finance should be appropriately restructured before incorporation.

Under section 162 of the Taxation of Chargeable Gains Act 1992, Incorporation Relief is available when a qualifying business is transferred to a company as a going concern, together with its assets, in exchange wholly or partly for shares. If the transferor receives consideration other than shares, the amount of relief can be restricted.

This Tribunal decision clarifies that immediate company refinancing and the SIS do not necessarily produce the same tax result, and that SIS can preserve full Incorporation Relief where conventional refinancing may put it at risk.