The First-tier Tribunal has confirmed that refinancing a mortgaged property business at the point of incorporation can jeopardise full Incorporation Relief. This finding highlights a potential technical failure in what many tax professionals, lawyers, and the mortgage sector have considered the conventional approach to incorporating such businesses.
For years, advisers have often recommended transferring properties into a company and replacing existing personal mortgages with new company borrowing upon completion. However, the Tribunal has now confirmed that this process is not tax-equivalent to the structure recommended by Property118, known as the Substantial Incorporation Structure (SIS).
The Tribunal's judgment indicates that full Incorporation Relief might not be obtained when refinancing occurs. In contrast, the SIS approach, which involves transferring beneficial ownership while existing mortgage liabilities remain with the former owners until later refinancing, can preserve full Incorporation Relief.
This risk associated with refinancing was previously noted in Simon's Taxes, a key professional reference work. It warned that if a company raises new finance to allow the transferor to repay existing debts, there is a considerable risk that HMRC may decline to apply Extra-Statutory Concession D32, which allows qualifying business liabilities taken over by the company to be ignored when calculating consideration other than shares.