The Property 118 Tribunal case concerned whether Scheme Reference Numbers (SRNs) issued in respect of two sets of arrangements were validly issued.

The arrangements in question – the SIS and the CAR – were designed to incorporate a property business run by a husband and wife to take advantage of the fact a company can still deduct interest and finance costs incurred in relation to residential lets – the interest relief restriction for unincorporated residential landlords does not apply to companies.

The Substantial Incorporation Structure (SIS) transferred the beneficial ownership of the properties to the company while the existing mortgages and legal title on the properties remained in the landlord’s name. The landlord collected the rents and paid the expenses on the company’s behalf.

The Capital Account Restructure (CAR) worked in a similar way to the SIS but included a bridging loan obtained by the landlord, with the funds being lent by the landlord to the company.

HMRC contended that the arrangements were notifiable arrangements in accordance with FA 2004, s. 306. They argued that both arrangements fell within the scope of the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), description 5 (standardised tax products) and that the CAR also fell within description 3 (premium fee) and/or description 9 (financial products involving contrived steps). They issued SRNs.

Property 118 and Cotswold Barristers Limited appealed the allocation of the SRNs to the First Tier Tribunal.

The issue was whether the SRNs were validly issued. This required the Tribunal to answer several questions, including whether the tax advantage was the main purpose of the arrangement or whether it was a main purpose among genuine non-tax commercial purposes, and whether the schemes fell within description 5 and the CAR within descriptions 3 and 9.

The First Tier Tribunal allowed the appeals, cancelling the SRNs.

It should be noted that the Tribunal only considered whether the SRNs were validly issued – it did not address whether the schemes work. This is a separate question.