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Incorporation Relief, HMRC Scrutiny and the New Reality After Budget 2025

For many landlords, incorporating a buy-to-let portfolio has long been seen as a route to improved tax efficiency. The restriction of mortgage interest relief for individuals made corporate ownership particularly attractive, and incorporation relief under TCGA 1992 s162 has often been relied upon to defer capital gains tax on the transfer.

However, incorporation has never been automatic or risk-free. The Autumn Budget 2025 marks a further shift in HMRC’s approach, turning what was once a background relief into a front-and-centre compliance issue.

This blog explains:

• What the courts have said about property incorporation
• Where HMRC is now focusing its attention
• Why proving a “business” is the real battleground
• What landlords and advisers should take away going forward

What the Courts Have Said: Incorporation Can Work — In Principle

The case most often cited by landlords is Ramsay v HMRC [2013] UKFTT 226 (TC).

In that case, the tribunal accepted that a large, actively managed residential property portfolio could amount to a business, allowing incorporation relief to apply. The decision confirmed that property letting is not automatically excluded from being a business for tax purposes.

But the tribunal was clear on one critical point:

Whether a property activity is a business is a question of fact and degree.

The decision does not mean that all buy-to-let portfolios qualify, nor that incorporation relief is routine. Each case turns on its own facts.

HMRC’s Starting Point: Most Buy-to-Let Is Investment

HMRC has consistently taken the position that most buy-to-let portfolios are investments, not businesses. That position has hardened over time.

While HMRC guidance often refers to factors such as time spent and level of activity, there is no statutory test. What matters is the overall commercial reality:

• Who does the work?
• What decisions are taken personally?
• How active is the landlord in day-to-day operations?

Where a portfolio is heavily agent-managed, lightly supervised, and largely passive, HMRC is likely to argue that it falls on the investment side of the line.

The Real Battleground: What Happens After Incorporation

In practice, HMRC often does not focus solely on whether incorporation relief technically applied at the point of transfer.

Instead, many enquiries concentrate on what follows incorporation.

A number of widely promoted arrangements involve:

• Transfer of beneficial interests only into a company
• Retention of legal title and mortgages personally
• Subsequent extraction of company funds to service personal debt

HMRC’s concern in these cases is not always the availability of s162 itself, but whether the post-incorporation structure creates:

• Income tax liabilities
• Disguised distributions
• Corporation tax adjustments
• Or outcomes inconsistent with the policy intent of the legislation

It is often these downstream consequences, rather than denial of incorporation relief, that generate tax yield for HMRC.

Spotlight 63 and Hybrid Property Arrangements

HMRC’s position is made explicit in Spotlight 63: Property business arrangements involving hybrid partnerships.

Spotlight 63 targets arrangements that:

• Artificially separate legal and beneficial ownership
• Seek to secure CGT or SDLT advantages without commercial substance
• Do not reflect the true economic position

While a Spotlight is not law, it is a clear signal of enforcement priorities. Structures that resemble those described in Spotlight 63 should be assumed to be high-risk and likely to attract HMRC scrutiny.

The Autumn Budget 2025: Why This Matters More Now

From 6 April 2026, incorporation relief will:

• No longer apply automatically
• Need to be actively claimed
• Require details of the transaction, computations, and the nature of the business transferred

This change means:

• HMRC will be alerted to every incorporation where relief is claimed
• Incorporation becomes a compliance trigger
• The evidential burden moves firmly onto the taxpayer

While the government suggests no immediate Exchequer impact, the forecast increase in CGT receipts in later years strongly implies increased post-transaction compliance activity.

Substance Over Structure

The key message is simple: structure alone is no longer enough.

HMRC will look beyond paperwork and ask:

• Is there a genuine business?
• Is the activity sufficiently active and organised?
• Are post-incorporation cash flows commercially coherent?
• Does the arrangement align with the intent of the legislation?

If the transaction only works because incorporation relief is assumed to be unquestionable, the planning is fragile.

Key Takeaways (Summary)

• Incorporation relief still exists, but it is no longer background legislation.
• Tribunal case law confirms availability in principle, not as a blanket rule.
• HMRC’s real focus is often on post-incorporation outcomes, not the relief itself.
• Hybrid and partial-transfer arrangements are high-risk.
• From April 2026, claiming incorporation relief will invite scrutiny.
• Landlords must be able to prove a genuine business, not just assert one.
• Incorporation should work commercially even if HMRC challenges it.

Final Thought

Incorporating a buy-to-let portfolio can still make sense — but only where it reflects genuine commercial reality and can withstand scrutiny years after the event.

The era of “quiet” incorporations is over. From Budget 2025 onwards, incorporation relief is something to be earned, evidenced and defended.

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