Section 162 incorporation relief in crisis

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Section 162 incorporation relief in crisis

Securing clarity and stability in the application Section 162 incorporation relief for property investment businesses: Why the industry needs updated guidance and consistent interpretation.

Over the past decade, UK landlords and their advisers have faced growing uncertainty in how Section 162 incorporation relief is interpreted and administered. What was once a relatively stable area of tax law has become increasingly unpredictable, with significant impacts on landlords, advisers, lenders and the wider private rented sector.

This statement highlights several systemic issues that have emerged. It is not about any individual case or taxpayer. It is about the need for clarity, transparency and modernised guidance so that the industry can operate confidently and fairly under a consistent and consistent set of rules.

Withdrawal of pre-transaction clearance without replacement

Until 2016, advisers could request non-statutory clearance on factual matters relevant to incorporation relief. When this route was withdrawn without public consultation, and without any replacement mechanism, taxpayers lost the only formal way to obtain certainty on issues such as:

• business status,
• the treatment of liabilities,
• beneficial ownership on transfer, and
• the interaction with commercial refinancing requirements.

For a tax relief that is automatic rather than elective, the absence of any pre-transaction certainty mechanism has created deep structural vulnerability. Incorporation activity increased significantly after Section 24, yet the system designed to support certainty effectively contracted.

The gap between published guidance and operational practice

In recent years, practitioners have encountered situations in which HMRC’s operational stance differs from what is stated in published manuals and long-established professional commentary. Several examples illustrate this widening gap.

Example A — Beneficial interest transfers and Section 162

Professionals have reported receiving indications from HMRC that transferring the beneficial interest in property does not qualify for incorporation relief, even when the entire business is transferred as a going concern and where economic ownership passes to the acquiring company before legal title is updated during refinancing.

This position is not reflected in legislation, case law, or HMRC’s published manuals, which historically recognise the distinction between beneficial ownership and legal title. Without clear guidance, advisers cannot be certain how HMRC expects incorporations to be documented in real-world lending environments.

Example B — FOI evidence of agreed HMRC manual updates that remain unpublished

A recent Freedom of Information response confirmed that HMRC has internally agreed significant updates to its manuals relating to incorporation relief. These updates include a replacement version of CG65745, which has not yet been published despite many months having passed since internal approval.

Example C — Indemnities for ‘taken-over’ liabilities.

HMRC officers have, in some enquiries, indicated that indemnities for liabilities “taken over” by a company on incorporation are unacceptable.

This appears difficult to reconcile with HMRC’s own published manuals, including both the existing published guidance and the new unpublished version connected to ESC D32, which explains that indemnities are “normally” the accepted commercial mechanism where liabilities are transferred economically at incorporation, i.e. before legal transfers and refinancing is complete.

Long-established commercial practice and HMRC’s own manuals align on this point; recent operational positions do not, creating considerable uncertainty for taxpayers and advisers.

Example D — Disparity between HMRC manuals and Simon’s Taxes commentary

The leading professional commentary, Simon’s Taxes (notably B9:112 and B9:114), provides long-standing guidance on:

• the conditions for incorporation relief,
• the treatment of liabilities,
• the role of indemnities

Historically, HMRC’s published manuals aligned closely with this commentary. Yet practitioners have encountered interpretations that diverge significantly, suggesting, for example, that economic ownership cannot transfer without simultaneous legal title transfer.

Example E – New financing at incorporation

A further HMRC viewpoint, expressed in at least one formal explanation of its technical position, stated that where a company raises new borrowing at the point of incorporation and uses that borrowing to repay the proprietor’s existing mortgages, part of the consideration may be treated as cash provided by the company. This reduces the extent to which the transfer is regarded as being in exchange for shares and therefore may restrict the amount of gain eligible for rollover under Section 162.

This does align with the warnings in Simon’s Taxes at B9:114, however, many advisers and taxpayers have long understood that ESC D32 existed to prevent “dry tax” where liabilities were economically transferred to the company as part of a genuine business incorporation.

The unpublished version of CG65745 continues to leave room for ambiguity on this point.

Example F – Capital account withdrawals: Simon’s Taxes and BIM45700 vs operational stance

Impact across the sector

• timely publication of agreed manual updates,
• transparent communication where HMRC’s interpretation has developed, and
• alignment between published guidance and operational enforcement.

• Landlords face uncertainty over past and future incorporations.
• Advisers face heightened professional-risk exposure when guidance lags behind operational interpretation.
• Lenders encounter delays and documentation challenges, complicating refinancing and reducing liquidity.
• The wider private rented sector suffers from reduced confidence at a time of already significant regulatory pressure.

Uncertainty on this scale can distort decision-making and undermine fair administration.

What the industry needs

To restore clarity and stability, the sector urgently requires:

a. Updated and published guidance

Reflecting modern business practices, lending constraints, refinancing cycles and beneficial ownership mechanics.

b. A clear route to pre-transaction certainty

Whether statutory or administrative, the current void is unsustainable.

c. Prospective, not retrospective, application of new interpretations

Where HMRC’s understanding develops, it must be applied to future transactions, not retrospectively.

d. Alignment between manuals, professional commentary and operational practice

Taxpayers should be able to rely on published guidance when structuring legitimate commercial transactions.

A constructive way forward

The purpose of this statement is to highlight systemic issues and encourage constructive dialogue between:

• HMRC,
• professional bodies,
• technical practitioners,
• lenders, and
• policymakers

Thousands of landlords have incorporated their businesses in good faith, based on the published guidance and professional understanding available at the time. They deserve clarity, consistency and fair treatment. A stable framework benefits everyone.

Supporting evidence

Simon’s Taxes B9:112 – LINK

Simon’s Taxes B9:114 – LINK

HMRC FOI response – LINK

Current CG65745 manual including ESC D32 as of 05/12/2025 – LINK

BIM45700 – LINK

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