Save content
Have you found this content useful? Use the button above to save it to your profile.
house to rent | accountingweb | Landlords double tax bills by taking poor advice
iStock_georgeclerk_rental_houses

Landlords double tax bills by taking poor advice

by

A tax planning scheme for landlords promoted by Property118 has been shown to double the tax payable and could lead to mortgage default.

15th Sep 2023
Save content
Have you found this content useful? Use the button above to save it to your profile.

Dan Neidle of Tax Policy Associates has dubbed a tax planning scheme for landlords: “the worst tax avoidance scheme ever”, as using it would double the tax payable and lead to mortgage default.

He talks to Rebecca Cave about the tax planning scheme promoted to landlords by Property118, in conjunction with Cotswold Barristers, and how it is doomed to fail. 

What is the problem the tax scheme trying to solve?

Landlords who hold residential properties (not holiday lets) in their own names can claim only 20% tax credit on the finance costs connected with those properties. This can make letting a mortgaged residential property unviable. 

If the landlord incorporates their property business the company can claim corporation tax relief for the finance costs, but the process of incorporation will trigger bills for capital gains tax (CGT) and stamp duty land tax (SDLT). 

The lender also needs to agree to move the existing mortgage to the new company, which is not normally granted. The company generally has to take out a fresh mortgage on the let property, which is likely to be much more expensive than the original buy-to-let mortgage. 

How does the Property118 plan suggest these problems can be avoided? 

The landlord sets up a new company and transfers the let property to it in return for shares in the company. However, the sale is not completed so legal title to the property remains with the individual who continues to be the registered owner on the Land Registry. 

Does this trigger a CGT bill for this individual? 

Property118 asserts that the individual can claim incorporation relief, which defers the gain arising on the transfer of the property and rolls it into the value of the shares. In my view, it is unlikely that the conditions for incorporation relief would be met as property letting is very rarely regarded as a “business” for CGT purposes. 

Because a property-holding trust has been inserted between the individual and the company (see below), the exchange of company shares for the whole of the property business hasn’t happened. This means the conditions for incorporation relief aren’t met. 

How does the individual avoid the restriction on tax relief for finance costs?

Here’s the clever/stupid part. A trust is set up to hold the property with the individual as the trustee and the company as the beneficiary. The mortgage company is not told about this trust.

The mortgage remains in the name of the individual who carries on making the mortgage payments. But the individual no longer has a property business, which has been transferred to the company, so the individual doesn’t qualify for the 20% tax credit on those finance costs. 

The company agrees to indemnify the individual for the mortgage costs, and claims tax relief for those indemnity payments. 

Whether the company qualifies for that tax relief is debatable. It doesn’t have a loan relationship as it has not borrowed money to use in the property business, so it can’t get a corporation tax deduction for the indemnity payments under the loan relationship rules.

For the company to get a deduction for the indemnity under the general rules for a property business, would require the indemnity to be recognised in the company’s accounts as a liability relating to the property income, and not as further consideration for the capital cost of acquiring the property.

In the worst-case scenario, the company pays out the indemnity and gets no tax relief, and the individual receives the indemnity and is taxed on it. The individual also loses his tax credit on the mortgage payment. 

The total tax paid by the company and individual doubles.

Does the hidden trust structure breach the mortgage agreement?

It is likely that it does, as the lender has not provided consent for the transfer of the property to the trust. UK Finance, the trade association for mortgage lenders, commented: “Transferring ownership of a property into a trust without informing your lender and seeking their consent would most likely be a breach of a mortgage’s terms and conditions.”

How is the liability to SDLT avoided?

This depends on there being a related couple (such as husband and wife) who have run the property business together as a partnership, and thus the partnership rules in FA 2003, Sch 15 apply to reduce the SDLT to zero. This is very difficult to prove, as the case: SC Properties & R Cooke vs HMRC shows. 

Would the company be liable to the Annual Tax on Enveloped Dwellings as well?

Where the value of an individual residential property is £500,000 or more when it is transferred to the company (or trust), the Annual Tax on Enveloped Dwellings (ATED) will apply. The company would then be required to make an annual ATED return or ATED relief claim. The penalties for late filing of an ATED return or ATED relief claim, can be up to £1,600 per year. 

Should this scheme be declared under the disclosure of tax avoidance scheme rules? 

I believe the scheme does meet at least two of the hallmarks under the disclosure of tax avoidance scheme (DOTAS) rules because the sole purpose of the scheme is to avoid tax, and the provider is charging a premium fee for the scheme (over £40,000). Failure to register a scheme under DOTAS can result in a fine of up to £1m.

What should landlords do if they have taken up this scheme to avoid tax? 

Any landlord who has taken up this scheme promoted by Property118 should seek tax advice from a tax specialist who is a member of a regulated body such as The Chartered Institute of Taxation, The Association of Taxation Technicians, The Institute of Chartered Accountants in England and Wales or The Institute of Chartered Accountants of Scotland. It would also be prudent to seek advice from a solicitor with experience in mortgages and property finance, in view of the potential for mortgage default.

Replies (33)

Please login or register to join the discussion.

avatar
By Justin Bryant
15th Sep 2023 17:56

DN's flawed analysis of this scheme (and many others) is explained here: https://www.accountingweb.co.uk/any-answers/dns-latest-tax-avoidance-ana...

Also, DN should know better than to rely on the case below for his above "This is very difficult to prove" comment, as the taxpayer facts there were extremely bad to put it mildly (i.e. a normal case done under professional advice and where that advice is followed would have much better facts and so is distinguishable):
https://www.bailii.org/uk/cases/UKFTT/TC/2022/TC08537.html

Thanks (2)
Replying to Justin Bryant:
7om
By Tom 7000
18th Sep 2023 09:38

Who is DN?

Thanks (0)
Replying to Tom 7000:
avatar
By Justin Bryant
18th Sep 2023 09:42

If you can read up to the first two words in the above article, all should be revealed!

Thanks (1)
Replying to Justin Bryant:
By Duggimon
18th Sep 2023 09:53

Justin, you might be right but it is as ever completely impossible to find your points through the series of nested links and vague allusions that make up your posts on anything more involved than random insults.

Could you not just reply to posts and articles with the points relevant to those posts and articles and leave out the "here's another post of mine, which links to some other threads which links to some third party analysis".

Thanks (11)
Replying to Duggimon:
avatar
By Justin Bryant
18th Sep 2023 09:59

You're only slightly less lazy than the other bloke above! As for insults, I'm merely pointing out why DN is wrong* in his analysis and why he appears to be a bit of a hypocrite and/or has an irony bypass re tax avoidance planning, like RM (I'm sure he's big enough to take such criticism, as am I re any of my comments here). (I am leaving aside plagiarism of certain of my posts here on DN's website.)

Re the so-called major, deal-breaking, insurmountable problem with the mortgagee re (undisclosed) nominees, see also: https://www.accountingweb.co.uk/any-answers/interesting-mortgage-fraud-s...
https://www.accountingweb.co.uk/any-answers/do-trusts-for-property-compa...
https://www.accountingweb.co.uk/any-answers/interesting-resulting-trust-...
https://www.accountingweb.co.uk/any-answers/useful-sdlt-case-re-s162-tcg...

*BTW I'm not picking on him. I also regularly criticise here judges who get things badly wrong as you know and I think that's only right.

Thanks (0)
Replying to Justin Bryant:
avatar
By richard thomas
18th Sep 2023 11:48

Dan's analysis is of a great many issues. Are you saying that between them the football agents case and the SCP settle in 118's favour the CT and IT issues, and in particular the deductibility of interest and the indemnity payments? If so, how?

Thanks (0)
Replying to richard thomas:
avatar
By Justin Bryant
18th Sep 2023 12:52

Richard, it's all explained in my various links. I have no time/inclination to do a separate stand-alone analysis here, but for a taste of what I mean re alleged mortgagee problem issues (which I find the most amusing in terms if what happens in practice compared to theory at least) see paras 39 & 131 here.
https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j8260/TC0...

See also: https://www.stepjournal.org/trusts_of_non-assignable/ , http://eprints.lse.ac.uk/61892/1/The_Nature.pdf

DN acknowledges he's possibly got things wrong on the latter point at least.

Thanks (0)
Replying to Justin Bryant:
avatar
By richard thomas
18th Sep 2023 13:30

I'm almost as lazy as Duggimon, because I gave up after 2 or 3 of the links in my bid to find one that had any relevance to the points I raised, as none I looked at, albeit lazily and superficially, covered the deductibility point at all.

So if as you say my specific issue is dealt with by a case law report or even a magazine/website article I would be delighted to be pointed to it. Otherwise I might be tempted to think that your total antipathy to anything DN says is a tad overdone.

Thanks (6)
Replying to richard thomas:
avatar
By Justin Bryant
18th Sep 2023 13:59

The LR analysis is here: https://www.accountingweb.co.uk/any-answers/interesting-thing-about-btl-...

NB you are completely wrong to say I have "total antipathy to anything DN says". I have commended some of DN's posts (just not all of them obviously). I think I'll leave it there.

Thanks (0)
Replying to Justin Bryant:
avatar
By richard thomas
18th Sep 2023 14:53

Thanks for the link, which was not as far as I can tell previously included. The Taxation article has two points of view, one of which, Pete Miller's, supports Dan (as he acknowledges) and the other doesn't. I assume you favour the latter.

Looking at the P118 website the LR position may be more nuanced than Dan suggests, as the accounting treatment in the company may possibly be relevant, as suggested in the second PoV. But I doubt if it can be the case that if the accounts say and account for it as a loan but legally it isn't that the LR rules will apply - "loan relationship" is a legal, not an accounting, term.

Dan accepts though that the indemnity payments made by the company are potentially deductible outside LR in any property business income comp. But (a) how are they incurred for the purposes of the business and (b) why are they not capital?

I've never seen your support of anything Dan has written, but I withdraw "total" and replace it with "oft expressed".

Thanks (2)
Replying to richard thomas:
avatar
By Justin Bryant
18th Sep 2023 16:07

Sorry, the LR position is better explained here: https://www.accountingweb.co.uk/any-answers/incorporating-a-soletrader-w...

This was a link in the above other link. The relevant bit is this:

"I see HMRC also agree with me re CT and LRs per Condition B here:
https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm33275

https://www.legislation.gov.uk/ukpga/2009/4/section/330A

Although arguably s304 CTA 2009 is sufficient re such debt assumptions, especially as s304(2) uses the word "include".

https://www.legislation.gov.uk/ukpga/2009/4/section/304#

So "ANA" is right here re LRs: https://www.taxation.co.uk/articles/feedback-1-june-2023"

Also, possibly "oft expressed" is nothing more than a function of DN's incorrect/misleading reporting i.e. if he wasn't so wrong about so much in the 1st place (a bit like RM) I would have more commending comments.

Thanks (0)
Replying to Justin Bryant:
avatar
By richard thomas
18th Sep 2023 16:51

Yes I agree that there would be CT deductibility IF and ONLY IF that is actually what P118 do. Relief at 19% or 25% if sufficient income.

There does seem to be a notable difference between what P118 say they do and what Dan says they do:

Dan: "X continues to make mortgage payments to the lender but, behind the scenes, the Company agrees to reimburse/indemnify X."

P118: "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."

P118's description does suggest s 330A is being exploited to give the result that property income profit is being taxed at CT rates, and that nothing is taxable (or deductible) on X. HMRC presumably don't regard that as avoidance.

Thanks (2)
Replying to richard thomas:
avatar
By Justin Bryant
18th Sep 2023 17:23

Agreed. I would have expected something basic like that to be in DN's analysis, even if to suggest a better way to do it (like I do from time to time!), hence my criticism.

Thanks (0)
Replying to Justin Bryant:
avatar
By richard thomas
18th Sep 2023 17:45

But, on the other hand, Dan is referring to documentation he has seen which seems to talk of indemnity payments and even out-of-pocket expenses. I don't think P118 can be relied on to have a consistent and correct understanding of any differences between what they think they are doing and what they are actually doing, and there may be different schemes or different variations from the ones on the website.

Thanks (1)
Replying to richard thomas:
avatar
By Justin Bryant
19th Sep 2023 09:06

I don't think either P118 or DN can be relied on here. They're both going to be biased in their views and so they are unreliable at best. My views are unbiased, being based simply on what I think should work and what shouldn't (in practice at least based on relevent case law/legislation).

BTW, for the record, here's an (albeit rare) example of me commending DN (I don't think I've ever done that for RM):

"Finally DN writes about something sensibly and correctly: https://www.taxpolicy.org.uk/2023/07/13/robot/"

https://www.accountingweb.co.uk/tax/business-tax/how-10000-stooge-direct...

Thanks (0)
Replying to Justin Bryant:
Ray McCann
By Ray McCann
19th Sep 2023 12:02

In the end what matters is what HMRC think of this and based on past experience it is almost certain that these arrangements will collapse under their own complexity.

Thanks (1)
Replying to richard thomas:
avatar
By SM80
18th Sep 2023 20:21

The 2017 brochure said this:
A business sale agreement acknowledges
that, as a condition of the sale, the company adopts
responsibility, in the form of an Indemnity, for the
servicing and repayment of any mortgages yet to be
redeemed....
The indemnity reference, at least in the 2017 version, has its origin in CG65745

Thanks (0)
Replying to Duggimon:
Ray McCann
By Ray McCann
18th Sep 2023 11:17

Yes there’s that but there is also that he’s not right. This is a classic wheeze that runs into non tax related legal issues so we will just pretend.

Thanks (1)
Replying to Justin Bryant:
avatar
By Karen whitehead
18th Sep 2023 12:05

I agree Justin the thing is that people seem to think that they can blindly take up this advice without carrying out all of the necessary paperwork. I actually have never like the insertion of the Trust company because that does seem to insert an unnecessary step for the avoidance of tax. If you can align all of your mortgages on your properties why not simply transfer them into the Limited Company from the partnership? Also if run as an LLP there can not be much doubt that a partnership exists.

Thanks (0)
Replying to Karen whitehead:
Galaxian
By Galaxian
19th Sep 2023 07:32

It depends on what you mean by 'transfer'.

A company taking out new mortgages to repay the old might not fall within ESC D32. It's a question of how HMRC interprets 'taking over'. If this means the same mortgage account number(s), then it may first be necessary to consolidate the mortgages with a lender who is willing to novate the debt to the company, to gain comfort that the transfer definitely falls within the concession.

Peter Rainey is of this view and he also suggests that the P118 offering may fall the wrong side of PCRT: https://www.peterrayney.co.uk/pdfs/CGT.pdf

Thanks (2)
Replying to Justin Bryant:
avatar
By Justin Bryant
13th May 2024 10:59

This bloke agrees the above case (SCP Ltd & Cooke v HMRC [2022] UKFTT 00214 (TC)) is not a good one for HMRC/DN: https://www.taxinsider.co.uk/joint-property-letting-vs-partnerships

Thanks (0)
avatar
By johnjenkins
18th Sep 2023 10:30

From what I can gather DN has had a bee in his bonnet about property 118 for some time. I believe Property 118 has already rebuffed DN's analysis. Justin you're right again.

Thanks (1)
Replying to johnjenkins:
avatar
By Justin Bryant
18th Sep 2023 10:33

Yes; even DN acknowledges (to his credit) that certain bits of his analysis are faulty/misconceived in the comments section on his website. I would be happy to check all his future exposés in advance for free if he wants me to.

Thanks (0)
RW
By RichardWelbourne
18th Sep 2023 10:44

Thank you for the helpful list of regulated bodies that are capable of handing such tax advice. Pretty sure the Association of Chartered Certified Accountants will feel a little left out...

Thanks (4)
avatar
By NomisNatsnud
18th Sep 2023 10:48

You haven't mentioned the fact that the tax credit for individuals (20%) is little different to the relief in the company's hands (19%), irrespective of any of the other issues that you have mentioned.
Then of course extracting any surplus income from the company will also give rise to a further tax position.
Putting property into a company is a question I get asked fairly regularly by clients.

Thanks (0)
avatar
By NomisNatsnud
18th Sep 2023 10:48

You haven't mentioned the fact that the tax credit for individuals (20%) is little different to the relief in the company's hands (19%), irrespective of any of the other issues that you have mentioned.
Then of course extracting any surplus income from the company will also give rise to a further tax position.
Putting property into a company is a question I get asked fairly regularly by clients.

Thanks (0)
Replying to NomisNatsnud:
By SteveHa
18th Sep 2023 12:31

Since you posted it five times, think of the landlord who, absent mortgage interest relief, is higher rate chargeable to tax at 40%, rather than just below the threshold when relief was given as a deduction, and then make the comparison with a company again. Let's see if you reach the same conclusion that there is not much difference.

Thanks (0)
Replying to SteveHa:
avatar
By NomisNatsnud
18th Sep 2023 13:56

Apologies for uploading 5 times - not intentional.
That's just my point - a BRT/HRT payer is still only getting 20% relief - holding the surplus in a company has no benefits if it is subsequently withdrawn - it only works if retained by the company for reinvestment - may suit those with a portfolio depending on their end game but for the investor with one/two properties who intends on taking the money in the short term, is going to be back to HRT +.
At least holding in your own name offers the benefit of being able to release capital without triggering an immediate tax charge.

Thanks (0)
By ireallyshouldknowthisbut
18th Sep 2023 12:28

The question I always pose clients on this, so as to avoid any technical argument is a business one.

"So when you remortgage the property which the lender thinks is in your name, and all the income is within the company, do you think they will accept a remortgage?"

Most people understand the scheme is simply not commercial as you would be tied into the existing lender.

Its going to be fun when HMRC finally look at these, long overdue.

Thanks (4)
Replying to ireallyshouldknowthisbut:
avatar
By Justin Bryant
19th Sep 2023 09:01

Yes. That's a good point that DN seems to overlook (that would have been by far his best point had he made it).

In fact, the whole DN piece is very amateurish in its analysis (e.g. compared to the Peter Rayney article mentioned above) and I'm surprised it appears to be written by an ex Head of Tax at one of this country's top law firms.

Thanks (0)
avatar
By jayraven1
13th Oct 2023 16:24

Justin, mate you are more confusing than any of the other stuff out there my heads spinning here .!
let me simplify the actual issue normal landlords are faced with here .....
with all the online activity surrounding the ethics and legalities of the property118 scheme I'm sure they thought their advice to all the landlords has been right, it certainly looked credible enough to us , the thing is I've approached many qualified tax companies since and found firstly that property 118s scheme is extortionately priced for what the regulated tax companies are saying is vague and misguided advice which "may" leave landlords open to problems with the tax office in future years, we found the property 118 crowd to be nice enough but after all this shadyness and doubt you would be mad to do any business with them , had anyone done so i would now think they would be seeking redress no matter what anyone is saying ..., its all very confusing but at the end of the day its the landlord and their families futures in the balance.

Thanks (0)
Replying to jayraven1:
Ray McCann
By Ray McCann
14th Oct 2023 18:19

If you try to make what the promoters of these schemes market fit within the tax and other legislation and even then the analysis is uncertain and beyond the abilities of anyone other than a deep dive expert, you simply prove two points: one, DOTAS will without doubt be engaged (nothing has been offered to show it has even been considered) and, two, very complex arrangements that involve multiple different legal areas - tax, property, banking, and partnership law is bound to fail upon careful scrutiny. In my experience the first such example might scrape through but thereafter a tweak here a tweak there, we don’t need this bit and it all goes wrong.

Thanks (2)
avatar
By JohnShallcross
09th Nov 2023 17:56

There is a forensic examination by Dan Neidle today of how the Property118 Substantial Incorporation Structure appears to be implemented. It can be found here: https://www.taxpolicy.org.uk/2023/11/09/badly/

It pleased me to see it includes a section on SDLT, though Dan had not seen any evidence in the cases he examined that Property118 / Cotswold Barristers had advised as to whether the properties concerned had been held as "partnership property".

There seem to me to be several stages to this test:

(a) Is there a "business"? (See Ramsay etc)

(b) Is the relationship between the persons carrying out the business one of partners, not just joint owners?

(c) If those tests are satisfied, is the property used by the partnership actually an asset of the partnership?

Thanks (0)