Substantial Incorporation Structure Explained

Many portfolio landlords are interested to know what is involved in the incorporation process.

This BLOG is the result of shortening many 100s of pages of information into the summary below:

Incorporation via Beneficial Interest transfer

• Used predominantly in England, Wales & Northern Ireland;
• Was accepted by HMRC, but in 2019/20, we have received a number of enquiries from HMRC;
• Some/ Few mortgage lenders have issues with this method of incorporation as where existing rates are highly favourable, many landlords may never transfer title and replace existing borrowing with company buy to let, even though Council of Mortgage Lenders have accepted this method, as the majority of borrowers will be on 2 year/ 3 year or 5 year products, & so will eventually transfer title & mortgage when current product expires;
• A Non-Statutory Advance clearance has been obtained from HMRC on this method in July 2017 and is still valid.

Incorporation via Substantial Incorporation method as an Alternative

• This is the only method on Incorporation in Scotland;
• First tried by McGoverns and Irvin Mitchell Solicitors in Scotland;
• Was agreed by courts as legal in October 2017, but the case was never published by HMRC or reported in tabloids;
• Since then HMRC have conceded this method as acceptable.
• Since conceding in January 2018, no enquiries have risen, though HMRC do continue to enquire on whether the properties are managed as business using tranditional business principles;
• When existing mortgage rates are particularly competitive, this method comes into its own, as costs associated with refinancing can be punitive;

Working Mechanics

• This involves substantially completing the sale of the whole of the rental property business (for Incorporation relief to be obtained under S162 TCGA92, this is a ‘MUST)’;
• Contracts are exchanged legally for the sale of entire rental property portfolio, but long-stop completion dates are agreed at the onset based on outstanding mortgage terms;
• A deposit is paid in the form of shares in the company representing net equity (i.e. gross value of properties less all liabilities);
• With the Completion of legal title deferred until at the behest of the company;
• A business sale agreement acknowledges that, as a condition of the sale, the company adopts responsibility for servicing any mortgages which have yet to be redeemed. The legal owners (now Bare Trustees) contract to act as Agents for the company (the Beneficial Owners) and make payments to their mortgage lenders on behalf of the company, which has adopted responsibility to service the mortgages. The insurable interest in the properties reverts to the company at exchange of contracts.;
• Also, as a condition of the Business Sale Agreement, from this point forwards the business is conducted within the company;
• The Business Sale transaction is substantially completed when contracts are exchanged, from HMRC perspective, if a sale is substantially complete, then legally it is deemed to have been completed within 30 days of exchange, whether the sale has been legally completed and registered or not.

Get in touch 

Get in touch if you have a portfolio and want to learn more about how to use incorporation as a method of enveloping your property portfolio.  

Feel free to add questions and comments below.