Praefectus Property Finance

HMRC warns landlords against hybrid business model tax avoidance schemes
HMRC has raised concerns about a scheme used by individual landlords to avoid paying tax on their property income.

Sometimes referred to as a ‘hybrid business model’, the arrangements seek to avoid tax by allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a corporate member.

According to HMRC, the aim of this is to bypass interest relief restrictions, reduce the tax payable on profits and capital gains, while also lowering inheritance tax.

Individual landlords using this scheme set up a limited company and create an LLP alongside this, with the limited company considered the corporate member.

The landlord then transfers their properties to the LLP, with members then allocating the LLP profits to themselves on a discretionary basis, so that they remain basic rate taxpayers.

The remaining profits are allocated to the corporate member.

The corporate member then claims a deduction for finance costs (such as mortgage interest) relating to the properties.

HMRC — which stated that this scheme doesn’t work and “strongly advises” landlords to withdraw from it and settle their tax affairs — said that if landlords think they are already involved in this arrangement and want to get out, HMRC can help.

It also announced that all scheme promoters need to comply with disclosure of tax avoidance schemes (DOTAS) legislation and ensure all marketed arrangements are declared to HMRC.

Those that fail to do so within five days of the scheme being made available or implemented risk a £600-per-day fine, which could escalate to a penalty of up to £1m if the original fine is not seen as a sufficient deterrent.

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eservices.landregistry.gov.uk