Why Property118 is NOT currently recommending s162 incorporation to landlords with mortgages

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Why Property118 is NOT currently recommending s162 incorporation to landlords with mortgages

In February 2026, Property118 took HMRC to the First Tier Tribunal (Tax).

The hearing went on for 10 days.

We took this action because, since late 2023, HMRC has argued that the use of an indemnity for existing mortgage liabilities to be taken over by a company is a discloseable tax avoidance scheme. This is despite their own published guidance and concessions stating that this is what normally happens.

 

The above is NOT new; the HMRC guidance has retained this form for over 50-years!

HMRC has also recently taken the currently unpublished view (discovered via an FOI request) that if a company takes on new mortgage liabilities and uses those funds to redeem existing mortgage liabilities, such funds could be treated as taxable consideration under CGT rules.

The above is more plausible, in our opinion, and also according to established and highly redarded industry textbook guidance published by Lexis Nexis, which says as follows …

 

Established practice?

There could be a very strong established practice argument against this too. This is on the basis that HMRC has been unable to produce any evidence of having previously declined relief based their own consession (ESC/D32), even where the company took on new borrowing to repay liabilities which existed prior to incorporation.

Nevertheless, landlords who are considering any form of s162 incorporation, especially if they have mortgages or any other form of liabilities secured against their rental properties, should, in our opinion, defer their decisions to incorporate using s162 relief until absolute clarity is obtained in law. The mentally stressful and emotionally draining aspects of appealing an HMRC ruling cannot be underestimated, never mind the costs, which can easily run into six figures to pay for the necessary legal support.

Also consider that it took us nearly two years to get HMRC in front of the First-tier Tribunal. That is despite Property118 having always recommended what we regarded as the safer option, which was to follow HMRC’s own published guidance and to heed the risk warnings in Simon’s Taxes.

The above is intended to serve as a warning not only to landlords, but also to accountants, solicitors, barristers, mortgage brokers, lenders and financial advisers.

Tribunal outcome

We expect the First-tier tribunal to make a ruling later this year, but the losing side could then appeal to the Upper Tribunal and beyond, resulting in the wait for much need clarity potentially being pushed back even further. Meanwhile, these matters continue to frustrate landlords who would like to incorporate their businesses for the reasons explained in HMRC’s GAAR Guidance Part D paragraph 2.2, as follows …

A conversation worth having?

If you are weighing up your own strategy, whether that’s to sell, expand, or restructure to improve profitibility, it is worth having a discussion with a Property118 consultant to take a closer look at how your portfolio is structured as a whole now, and to forecast the outcomes based on multiple scenario’s.

These conversations are typically most useful for landlords with established portfolios and relatively modest borrowing who are beginning to reflect on how their assets could work more effectively in the years ahead.

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