Property118 has won a First-tier Tribunal appeal against HMRC over the tax authority’s decision to allocate Scheme Reference Numbers and issue a Stop Notice in relation to its landlord incorporation model.
DOTAS labels attached to the arrangements have been removed as a result of the ruling.
Litigation centred 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.
It cited “improved lending affordability calculations for corporate borrowers”, as well as older landlords paying greater attention to continuity and succession planning.
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Section 24 not main reason behind landlord incorporation
HMRC had questioned whether the arrangements were set up 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). The OTS gathered where landlords were driven to incorporate for tax reasons those reasons were mainly linked to the restriction on interest relief and the lower rate of corporation tax compared with higher and additional rates of income tax.
It also recorded that retaining profits inside a company can result in a lower effective tax rate than holding property personally, because corporation tax is lower than higher and additional rates of income tax.
Mark Alexander’s, Property118 founder, told the tribunal that tax was not the main benefit of incorporation.
In a subsequent LinkedIn post, he said HMRC had “looked at the tax consequences and assumed tax avoidance”, while failing to understand the commercial evidence behind the structures it challenged.
Alexander said landlords had a range of commercial reasons for pursuing incorporation.
“Some wanted to preserve competitive mortgages that would have been expensive or impossible to replace,” he wrote.
He added that others faced cladding issues, early repayment charges, complex portfolios spread across multiple lenders or refinancing costs that could run into six figures.
“Tax mattered, of course it did, because no sensible business owner ignores tax, but it was one part of a much wider commercial decision,” he said.
Alexander said hundreds of landlord families had lived “under the shadow of DOTAS”, with clients who had acted on professional advice treated as users of a tax avoidance scheme.
Howard Reuben, broker, principal and founder of HD Consultants, said: “HMRC may appeal, the actual tax strategies promoted by Property118 were implemented by Cotswolds Barristers (not Property118), and so the Tribunal still did not concede that the underlying tax planning from Cotswolds Barristers is robust.
“This is a brilliant first step win for Property118, but it is still a ‘wait-and-see’, as many lenders have already told me that there is no change in their lending decisions.”