Property Incorporation Relief (Section 162): The New 2026 Claims Process

Section 162 of the Taxation of Chargeable Gains Act 1992 defers the personal CGT charge that would otherwise crystallise when a property landlord transfers their portfolio to a limited company in exchange for shares. For a Harrow landlord transferring £2m of property with £600,000 of latent gain, Section 162 is the difference between £100,000-£140,000 of immediate CGT and a deferral that holds the latent gain inside the share base cost until eventual disposal.

From April 2026 the Section 162 claim process changed materially. The relief continues to exist but HMRC now requires up-front evidence of an active property business in claim documentation, rather than allowing the relief to be claimed by default and challenged later. For passive single-tenant BTL landlords with low management activity, the new test makes successful claims considerably harder. For active multi-property HMO operators with documented hours, it remains achievable.

How Section 162 actually works

Section 162 defers (not eliminates) the CGT charge. Mechanics:

1. 1Landlord transfers all assets of the property business to the company.
2. 2Consideration is received wholly or partly in shares of the company.
3. 3CGT on transfer is deferred against the share base cost.
4. 4Latent gain becomes payable when shares are eventually sold or extracted.
5. 5If the landlord dies before extracting, the latent gain may be reset under CGT rebasing on death (subject to IHT).

The 2026 substance-over-form test

HMRC's 2026 guidance focuses on whether the activity transferred is a "business" (active management) rather than a passive investment. The factors weighed:

• Hours of active management per week. The benchmark from case law is 15-20 hours.
• Number of properties under direct management. Single-property portfolios face the highest scepticism.
• Whether tenant-finding, rent collection, repairs and inspections are handled in-house or fully outsourced to agents.
• Whether the activity has been continuous for at least 12 months pre-transfer.
• Documentation: time logs, management diaries, communications with tenants, supplier invoices.

The 2026 process change is that HMRC expects this evidence to be filed alongside the claim, not produced reactively if challenged. Landlords with passive single-property portfolios fully outsourced to a letting agent will struggle to evidence the substance test under the new approach.

The SDLT trap on transfer

Section 162 defers CGT but does nothing for SDLT. Transferring a personally-held property to your own SPV is, for SDLT purposes, a sale at market value:

• The 5% additional-dwelling surcharge applies because the SPV is acquiring residential property.
• For a typical 4-property Harrow portfolio at £450k average, SDLT on transfer to an SPV is in the region of £85,000-£105,000.
• Multiple Dwellings Relief is largely unavailable post-2024 (limited to 6+ property transactions).
• Partnership-to-company incorporation can avoid SDLT where a genuine partnership pre-exists the incorporation, but the partnership must be substantive and have existed for at least 12 months.

Handling existing mortgages

Most personal BTL mortgages cannot be transferred to a limited company. The practical sequence:

1. 1Refinance each property onto an SPV-eligible commercial or BTL mortgage in the company name. Lender stress-testing is more conservative for SPVs.
2. 2On completion of refinancing, the personal mortgage is repaid from the company's new facility.
3. 3Early Repayment Charges on the existing mortgage typically apply (1%-5% of outstanding balance).
4. 4Lender fees on the new SPV mortgage typically run 1%-2% of facility value.
5. 5For a £400,000 personally-held property at 75% LTV, refinancing to SPV typically costs £8,000-£15,000 in fees.

Portfolio valuation: avoiding HMRC disputes

Transfer must be at market value. HMRC challenges the valuation where it appears to suppress the transferred gain. Practical defence:

• RICS Red Book valuation by a chartered surveyor for each property.
• Comparable evidence (recent sales of similar properties in the immediate area).
• Conservative valuation rather than aggressive suppression: a 5% understatement saves £20-£40k of immediate CGT but risks an HMRC enquiry.
• Valuation date must be the actual transfer date, not a backdated figure.
• Where the portfolio has been re-mortgaged in the last 12 months, the lender's valuation provides supporting evidence.

The cost of a failed Section 162 claim

Where HMRC rejects the substance test post-claim, the consequences are immediate:

• CGT crystallises at the date of transfer at the seller's actual rate (24% higher rate for residential).
• Late-payment interest from 31 January following the year of transfer.
• Potential penalty of 15%-30% of the tax for failure to take reasonable care.
• For a £600,000 latent gain on a Harrow portfolio, the worst-case post-failure liability runs £160,000-£200,000.

When to elect out of Section 162

Counterintuitively, electing out of Section 162 can be the right move when:

• The landlord has unused capital losses to absorb the gain.
• The landlord is in a low-tax-rate window (basic-rate band, retirement income).
• The annual exempt amount and personal allowance can be used efficiently.
• Setting a higher share base cost via crystallised gain reduces future extraction tax materially.
• The substance test is borderline and the landlord prefers certainty to deferral.