Door closes on landlords using hybrid schemesby
HMRC’s high net worth unit has sent a letter to a small number of agents and their clients to encourage them to withdraw from a property tax planning scheme as pressure mounts on landlords avoidance schemes.
A one-to-many letter sent by HMRC’s high net worth unit focuses on a tax planning scheme being marketed to individual property landlords, where it advises them to structure their business using a “hybrid business model”. This avoidance scheme was highlighted in HMRC’s Spotlight 63.
HMRC has advised those receiving the letter to make a disclosure by 31 January 2024 and settle their tax affairs, with those failing to do so exposing themselves to the potential opening of an enquiry.
Included with the letter is a fact sheet that said the tax planning scheme “doesn’t produce the tax outcomes it claims to”.
How the scheme claims to work
HMRC explained in the Spotlight that the hybrid model attempts to avoid tax and reduce mortgage interest by “allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a corporate member”.
HMRC explained that the scheme claims to work as follows.
- The landlords or their family members establish a limited company.
- The landlords set up an LLP alongside the limited company.
- The landlords transfer the properties to the LLP.
- The LLP then diverts the profits themselves, with individual members allocated an amount of the profit that the scheme claims will keep them as a basic rate taxpayer.
- The remaining profits are handed to the corporate member. They claim a tax deduction for property finance costs, like mortgage interest.
The scheme claims to bypass mortgage interest relief restrictions, reduce the tax payable on profits generated by the property business, reduce capital gains tax when properties are sold and reduce inheritance tax (IHT) payable on death.
HMRC concluded in the Spotlight that the scheme does not work and those that use it may end up paying extra tax, interest and penalties.
Expanding in Spotlight 63 and the fact sheet, HMRC dismissed the viability of the scheme on the basis that it is caught by:
- mixed member partnership legislation in the Income Tax (Trading and Other Income) Act, which details how excess profits of a corporate member of an LLP are reallocated to individual members
- disposal of income streams through partnerships anti-avoidance legislation in Income Tax Act 2007, Chapter 5AA, S809AAZA, which charges the corporate members income on the landlord who transfers the income stream
- the Taxation of Chargeable Gains Act 1992 S59A, which treats any dealing in chargeable assets by an LLP as by the individual members
- a property rental is likely to be within the exclusions from Business Property Relief (BPR) and the hybrid model does not change the availability of such relief.
Dan Neidle’s take
Dan Neidle, the founder of Tax Policy Associates appeared on AccountingWEB’s No Accounting for Taste last week to discuss his run-ins with promoters of property avoidance schemes. He raised concern about a scheme promoted by Less Tax for Landlords, which he said closely resembled the one described by HMRC in the Spotlight.
Describing Less Tax for Landlords as “the worst avoidance scheme I’ve seen”, Neidle said on the podcast that the scheme makes several “interesting” claims.
“The first is that when the property goes to the LLP, there’s no change in beneficial ownership and so no upfront capital gains tax or stamp duty land tax. They make the contradictory claim that they reallocate income within the LLP, so it goes to the company, not the landlord, and you get corporation tax and you get interest deductibility. Those two claims cannot both be true.”
He continued: “They also ignore or misunderstand the mixed partnership rules, which are there to stop you just allocating income because it’s convenient to companies in mixed partnerships.”
But he said the worst element of the scheme is that they claim that a property rental business will benefit from business property relief (BPR) when you put it in an LLP “which for inheritance tax purposes would be a massive benefit, but it’s not true.
“If you have a business tht isn’t BPR qualified and you put it in an LLP it’s not going to make it BPR qualified. And no one’s been able to understand why they think this.”
Less Tax for Landlords has sponsored landlord conferences and won industry awards, but as Neidle said, “Dozens of senior advisers just couldn’t understand how [Less Tax for Landlords] thought it worked.”
Rise of landlord avoidance schemes
Tax avoidance schemes have been in the headlines recently following a number of investigations from Neidle.
On the podcast, the former head of tax at Clifford Chance described landlords as “easy prey” for avoidance scheme promoters because “a lot of them are trying to find a way around section 24”.
Ex-Chancellor George Osborne brought in section 24 in 2015. Neidle explained that the change of law over time “limited the ability of landlords to claim a tax deduction for their mortgage interest”, and as a result of this, a lot of people ended up as “accidental landlords” with one or two properties.
“They may be in a position where tax means that their business is no longer economic. And I think the point of George Osborne’s reforms was to make it non-economic and to drive them out of the business,” explained Neidle.
Listen now to Dan Neidle’s full interview on the No Accounting for Taste podcast. Aside from landlord avoidance schemes Neidle covers the Autumn Statement, tax complexity and more over the course of this 45-minute interview.