For those that don’t know, Property118 are a high-profile organisation who widely marketed their version of “incorporation” – transferring property portfolios held by individuals into companies, mainly to landlords adversely affected by the “Section 24” interest relief restrictions.  

They attracted a following of landlords that took advantage of their planning.  Many of those landlords are now facing enormous tax bills as HMRC have sought to challenge the planning as ineffective and indeed creating additional liabilities that would not have existed had the planning not been utilised.

Let’s start with the good news for those affected. I think it is fair to categorise this as a significant win for Property118.  It would however be premature to start popping champagne corks despite the understandable celebratory tone of Property118’s subsequent release.

So, what happened?  A decision by the First-tier Tribunal has indeed ruled in favour of Property118.  At the heart of the dispute was HMRC's decision to issue Disclosure of Tax Avoidance Schemes (DOTAS) Scheme Reference Numbers (SRNs) to arrangements marketed by Property118. Property118 challenged those decisions, arguing that the arrangements did not meet the tests requiring notification under the DOTAS regime. The First-tier Tribunal allowed the appeal and cancelled the SRNs.

The allocation of an SRN is broadly an indication that HMRC regards an arrangement as existing purely for the purposes of tax avoidance.  It is not in itself a factor in whether the planning is effective.  Property118 however have long argued that it was simply helping landlords access well-established reliefs.

The tribunal did touch on broader questions surrounding the transfer of property businesses into companies and the operation of incorporation relief under Section 162 TCGA 1992. Although no specific outcome on this point was decided by the tribunal, the operation of Section 162 is at the heart of the concerns for those affected.  

If the relief applies, then no Capital Gains Tax (CGT) would arise on the transfer and the newly formed company would have an uplift to market value for offset when taxing against any future property disposals.  If Section 162 does not apply then the potential CGT liabilities can be vast and for many, potentially devastating.

Perhaps the most important takeaway is that the Tribunal did not rule that every Property118 planning arrangement works, nor did it determine the tax treatment of individual landlords who implemented such strategies.  It is likely that the main factors that will ultimately determine the outcome will be unique to each landlord and thus incapable of settlement via the dispute between Property118 and HMRC.

As a result, landlords should avoid interpreting the judgment as an automatic green light for incorporation or as confirmation that all historical planning involving Property118 will achieve the expected tax outcomes. Nevertheless, this will undeniably reassure many of those affected.

It is tempting to take the decision as a green light for another landlord rush to incorporation.  Personally, I would counsel caution - each case should be taken on its merits on the technical details. Questions relating to incorporation relief, mortgage refinancing, CGT, SDLT and partnership status remain highly fact sensitive. The Tribunal's judgment does not remove the need for professional advice tailored to a landlord's specific circumstances.