Property118 has announced that it is currently not recommending Section 162 incorporation to landlords who have mortgages on their properties. This cautious stance follows a lengthy legal challenge against HM Revenue & Customs (HMRC) and ongoing uncertainty surrounding the tax treatment of mortgage liabilities during business incorporation.

Background to the HMRC Tribunal Challenge

In February 2026, Property118 initiated a legal challenge by taking HMRC to the First Tier Tribunal (Tax), with the hearing lasting ten days. The dispute centres on HMRC’s position, which has evolved since late 2023, that using an indemnity for existing mortgage liabilities to be taken over by a company constitutes a discloseable tax avoidance scheme. This stance contradicts HMRC’s own longstanding published guidance and concessions, which acknowledge that such indemnities are normally part of the incorporation process.

HMRC’s Capital Gains Manual (CG65745) explains that while the transferor is not required to transfer business liabilities to the company, it is common practice for the company to provide an indemnity for those liabilities. Furthermore, the manual clarifies that business liabilities taken over by the company are generally ignored when quantifying ‘other consideration’ for capital gains tax (CGT) purposes, recognising that the transferor does not receive cash to meet tax liabilities and that shares in the company are correspondingly less valuable.

This guidance has been in place for over 50 years, making HMRC’s recent challenge particularly significant.

New HMRC Views on Refinancing and Taxable Consideration

In addition to the above, HMRC has recently expressed an unpublished view—discovered through a Freedom of Information request—that if a company assumes new mortgage liabilities and uses these funds to repay existing mortgages, the new borrowing could be treated as taxable consideration under CGT rules. This interpretation aligns more closely with established industry guidance, such as that found in the respected textbook Simon’s Taxes.

Simon’s Taxes (B9:114) highlights the risks involved in refinancing during incorporation. It warns that if a company raises new finance to settle the transferor’s debts rather than assuming the same liabilities, HMRC may refuse to apply its usual concession (ESC D32). The advice is to ensure appropriate financial restructuring occurs before incorporation to mitigate this risk.

Established Practice and the Need for Caution

There is a strong argument based on established practice that HMRC’s current position lacks precedent. Property118 notes that HMRC has not produced evidence of previously denying relief under ESC/D32 in cases where companies took on new borrowing to repay pre-existing liabilities during incorporation.

Despite this, Property118 advises landlords with mortgages or other secured liabilities on rental properties to defer any decisions to incorporate under Section 162 until there is absolute legal clarity. The process of appealing HMRC rulings can be mentally and emotionally taxing, as well as costly, with legal fees potentially reaching six figures.

Property118’s own experience underscores these challenges, having taken nearly two years to bring HMRC before the First-tier Tribunal. Throughout this period, the platform has recommended following HMRC’s published guidance and heeding the warnings in Simon’s Taxes as a safer approach.

This cautionary advice extends beyond landlords to include accountants, solicitors, barristers, mortgage brokers, lenders, and financial advisers involved in such incorporations.

Tribunal Outcome and Future Implications

The First-tier Tribunal is expected to deliver a ruling later in 2026. However, the losing party may appeal to the Upper Tribunal and potentially further, which could delay much-needed clarity for landlords wishing to incorporate their businesses.

This ongoing uncertainty frustrates landlords who see incorporation as a legitimate option recognised by Parliament. HMRC’s General Anti-Abuse Rule (GAAR) Guidance Part D paragraph 2.2 acknowledges that decisions such as incorporating a business or choosing to borrow to invest in buy-to-let properties are recognised legislative choices intended to allow taxpayers flexibility in managing their affairs.

What this means for landlords

Landlords considering Section 162 incorporation should proceed with caution, especially if their portfolios include mortgages or other secured liabilities. The current legal ambiguity means that incorporation could trigger unexpected tax consequences, potentially undermining the financial benefits landlords seek.

Engaging with professional advisers who understand the nuances of these issues is essential. Landlords should also be prepared for the possibility of lengthy legal processes if HMRC challenges their incorporation strategy.

A conversation worth having

For landlords contemplating selling, expanding, or restructuring their portfolios, Property118 recommends consulting with their experts. These discussions can provide valuable insights into portfolio structure and forecast outcomes across various scenarios.

Such advice is particularly beneficial for landlords with established portfolios and moderate borrowing who wish to optimise their assets’ performance in the future.

Source: Based on reporting from Property118

TLA Training Academy

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TLA update

The Landlord Association is currently onboarding new service providers into its Trusted Partner Hub, a new initiative designed to support landlords, tenants, letting agents, and property managers with vetted, high-quality services. As one of the fastest growing landlord associations in the UK, TLA offers partners direct access to an engaged and active member base at the point of need. Service providers across legal, maintenance, insurance, finance, mortgages, tenant screening, and property services can register their interest here: https://landlordassociation.org.uk/become-a-tla-service-partner/