Property118 v HMRC revisited: what the judgment found

By Tom Entwistle, LandlordZONE

The First-tier Tribunal’s ruling that Property118’s incorporation planning did not need to be disclosed under the Disclosure of Tax Avoidance Schemes rules was covered on this site shortly after the judgment was published. 

Following comments to LandlordZONE arguing that the earlier piece gave too much weight to what the tribunal was not asked to decide, and not enough to the detailed, favourable findings it did make about the commercial reasoning behind the arrangements, I’ve taken another look. 

So, having revisited the judgment, that is a fair point and needs correction. This article sets out the tribunal’s reasoning in fuller detail.

The headline result stands out. The tribunal cancelled the scheme reference numbers HMRC had issued against Property118 and Cotswold Barristers, having rejected every one of the disclosure grounds HMRC relied on. 

That is not just a technicality. It followed detailed findings which were reached after a ten-day hearing. This was about why landlords used these structures and whether the mechanics involved were artificial. Those findings deserve serious consideration, alongside equal limits on what the case decided.

This article covers the position in England and Wales. It is intended as general information for landlords and letting professionals and does not constitute legal or tax advice. Landlords with concerns about their own tax position should consult a qualified, professional adviser.

What SIS and CAR were designed to do

Property118, founded by longstanding landlord Mark Alexander, built a following among portfolio landlords who were affected by the Section 24 restrictions on mortgage interest relief. This was phased in between 2017 and 2020. 

Working with a barristers’ chambers, Cotswold Barristers, Property118 developed two structures for incorporating a rental portfolio:

The Substantial Incorporation Structure (SIS) transferred beneficial ownership of the properties to a new company while legal title, and the existing mortgages, remained in the landlord’s name. 

An agency agreement let the landlord continue collecting rent and paying costs on the company’s behalf. The stated purpose was to allow incorporation to proceed without forcing an immediate, and potentially costly or impractical, refinance of existing borrowing.

The Capital Account Restructure (CAR) added a same-day loan on top of SIS. Here, the landlord borrowed a sum from a bridging lender, lent the same amount to the new company, and the company used it to repay the bridging lender. This left the company owing the landlord a director’s loan that could later be withdrawn without a further personal tax charge. 

The stated purpose of this was to let landlords access capital already tied up in their business, rather than see it locked permanently into company shares on incorporation.

The tribunal’s findings 

HMRC’s case was that tax was the main purpose of both structures. The tribunal disagreed with this; its reasoning was more detailed than a simple rejection of HMRC’s position.

On SIS, the tribunal heard evidence of specific, non-tax reasons for avoiding an immediate refinance on incorporation. These included properties affected by cladding issues, mortgages with historic rates that could not be replicated, early repayment charges, and lenders unwilling to offer equivalent company lending at all. 

Weighing up all of this, the tribunal concluded that while obtaining incorporation relief was a main purpose of SIS, it was not necessarily the main purpose once these other commercial factors were taken into account.

On CAR, the tribunal accepted that landlords had a genuine commercial reason for wanting to access capital that was already built up in their businesses, rather than have it locked inside company shares. 

This is not a unique concern. Established professional guidance has long advised business owners to withdraw a positive capital account before incorporating. That’s designed precisely to avoid that outcome. The tribunal accepted that CAR was addressing this recognised practical issue and was not simply a manufacturing one.

The consequence, in both cases, was the tribunal found that obtaining a tax advantage was a purpose of the arrangements, but not the main purpose. That distinction carries real legal weight under the DOTAS disclosure test. It turns specifically on whether tax was the single dominant purpose. It is the reason the scheme reference numbers were cancelled.

The CAR bridging loan

A separate part of HMRC’s case was relevant only to CAR. This was that the bridging-loan mechanism amounted to a “contrived or abnormal step” of the kind DOTAS is designed to highlight.  Money moving in a same-day circle, controlled throughout by parties connected to the arrangement is a red flag to HMRC.

But the tribunal rejected HMRC’s argument. Having examined the short-term borrowing, the independent lender, the flow of funds and the resulting director’s loan, it concluded, at paragraph 185 of the judgment, that there was nothing unusual or contrived about the relevant steps.

It therefore concluded the arrangement served an underlying commercial purpose. It also found, separately, that the fees charged by the lender and by Property118 were nothing more than ordinary commercial charges for providing short-term finance, rather than a premium priced to reflect the tax result.

Here is Property118’s analysis: https://www.property118.com/seven-findings-in-the-property118-tribunal-judgment-critics-seem-reluctant-to-discuss/ 

This has not gone unchallenged

Tax Policy Associates (TPA), the organisation that first raised concerns about the scheme in 2023, argues that in reaching this conclusion the tribunal examined the purpose of releasing capital before incorporation, rather than the steps themselves.

In its view (TPA), that is what the regulation actually requires.  It says that the tribunal did not address HMRC’s separate point that, once the loan was unwound, the landlord and company were left in exactly the same economic position as before it began. 

On this reading, thinks Dan Neidle of TPA, the paragraph 185 finding may be more vulnerable to challenge than Property118’s own interpretation suggests.

Both organisations have a stake in how this point is interpreted. TPA has campaigned against the scheme since 2023 and believes HMRC has good prospects of overturning the decision on appeal. Property118 is confident of its own position.  

Landlords weighing the two positions may find it useful to note what both sides agree on: the tribunal did make this finding, in the above terms, at paragraph 185.  It did not adopt either party’s view of whether the finding was correctly reasoned.

What does the ruling still leave open?

None of the above means the underlying tax planning has been confirmed to work for any individual landlord. The tribunal was answering a specific, and narrow question: whether SIS and CAR needed to be disclosed to HMRC under DOTAS. 

It was not asked to, and did not, rule on whether any particular landlord’s incorporation relief claim under section 162 of the Taxation of Chargeable Gains Act 1992 was valid, on the SDLT treatment of any transaction, or on whether the declaration of trust arrangements had any unintended effect on mortgage terms.

HMRC’s separate enquiries into individual Property118 clients’ tax positions will continue independently of this case. Most of the landlords who gave evidence in the tribunal remain under open HMRC enquiry. 

The tribunal itself recorded that they understood the proceedings had no bearing on their own tax position. Property118 has confirmed that two linked lead appeals addressing these substantive issues are currently listed to be heard together at the First-tier Tribunal on 27 to 29 October 2026. This event should provide considerably more clarity for affected clients than this DOTAS case. 

It is also worth noting that this is a First-tier Tribunal decision, which does not set binding precedent, and HMRC has 56 days from the 31 July 2026 judgment date to seek permission to appeal.

What should landlords do?

The tribunal’s findings on commercial purposes are a genuinely positive development, but the outcome of each landlord’s own case will still depend on their own facts. This includes whether their letting activity qualifies as a business capable of being transferred as a going concern. See the LandlordZONE article: Is letting property a business, a trade or simply a passive investment?

Landlords should take independent advice from a Chartered Tax Adviser, chartered accountant, or solicitor with genuine property tax expertise.

If you are considering incorporation for the first time, remember relief depends on the facts of your own circumstances. Check any tax structure you are considering against your own portfolio and seek independent advice before committing to something that could be very costly to unwind.

Conclusion

The tribunal made detailed and reasoned findings that should be helpful to the landlord’s case, particularly on the commercial rationale behind SIS and CAR as being genuine. It rejected HMRC’s argument that the CAR bridging loan was a contrived or abnormal step. 

Those are positive outcomes for landlords. Property118 has a legitimate basis for describing this as a significant result. 

At the same time, the tribunal did not, and was not asked to, decide whether incorporation relief, SDLT treatment, or any other tax consequence of these schemes applies correctly to any individual landlord’s own transactions. 

Both of those things are true, and a fair account of the case needs to accept both are legitimate arguments.

See also: The LandlordZONE article by Barry Soraff, “Property118 v HMRC: What the tribunal decision means for landlords”, 4 August 2026

Editor’s note: this article updates an earlier piece on the same judgment, following comments querying the balance of that coverage.