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A photo of of a To Let property agency sign outside a house |AccountingWEB| HMRC shuts door on landlords avoidance scheme
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Door closes on landlords using hybrid schemes

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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. 

30th Nov 2023
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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. 

Replies (19)

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By Justin Bryant
30th Nov 2023 16:40

Re P118 BTL s162 incorporations, since s162 relief is automatic and does not need a claim per link below, the position is analogous to PPR cases where the taxpayer has sought advice on such relief and so HMRC ETL DA is invalid unless HMRC can prove the agent has been careless, which (unless they're obviously careless) is usually not easy for them (interestingly, if HMRC have no evidence of (agent) carelessness when ETL DA is issued, it’s not invalid in the 1st place for that reason per the PPR case below).

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65700
https://www.rossmartin.co.uk/private-client-a-estate-planning/capital-ga...
https://assets.publishing.service.gov.uk/media/5c87a7fb40f0b6369c4eeb8c/...

I doubt DN mentions any of that!

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Replying to Justin Bryant:
By Ruddles
30th Nov 2023 17:39

Justin Bryant wrote:
interestingly, if HMRC have no evidence of (agent) carelessness when ETL DA is issued, it’s not invalid in the 1st place for that reason

I am genuinely intrigued as to how to how you reach that conclusion - please explain.
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Replying to Ruddles:
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By Justin Bryant
01st Dec 2023 08:52

See paras 326 & 329 of the above FTT decision (that was not disturbed by the UT). I (and no doubt KG) would be delighted if you (or even RT!) could prove me wrong there.
https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j9880/TC0...

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Replying to Justin Bryant:
By Ruddles
01st Dec 2023 11:25

I was not suggesting that you were wrong. As I said, I was genuinely interested to understand how you had reached that conclusion because, IMO, the paragraphs cited do not support that conclusion. They deal only with the fact that the Officer did not mention carelessness when issuing the DAs. That is not the same as saying that HMRC have no evidence of carelessness. But I think I now understand what you meant to say.

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Replying to Ruddles:
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By Justin Bryant
01st Dec 2023 12:25

Yes; you clearly misunderstood what I clearly said (I'm not that dumb to say what you think I said)!

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Replying to Justin Bryant:
By Ruddles
01st Dec 2023 13:38

In my defence, it was a justified misunderstanding. There is a clear and obvious difference between not having evidence of carelessness and a failure to make mention (when raising the assessment) of such evidence. Since your statement (clearly) referred to the having of evidence I would suggest that your message was less obvious than you think it was.

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Replying to Ruddles:
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By Justin Bryant
01st Dec 2023 13:51

Relax! I'm just saying I'm not that dumb (I assumed you would reply "you could have fooled me!").

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Replying to Justin Bryant:
By Ruddles
01st Dec 2023 14:25

I'm not in the habit of dishing out unprovoked insults just for the sake of it ;¬)

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Replying to Justin Bryant:
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By richard thomas
04th Dec 2023 14:31

Like Ruddles, I don't see how those paras of my decision justify your statement. Unlike them I am not sure I do understand what you are saying - is it that HMRC can never get home on s 29(4) carelessness on behalf of the taxpayer without at the time of the assessment having evidence of that carelessness? If so I do not think the UT's decision in the Ritchies supports that.

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Replying to richard thomas:
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By Justin Bryant
04th Dec 2023 16:49

Richard, no I am not saying that or disagreeing with what you said in FTT. However, if you now think what you said in FTT was wrong at the above paras I would love to know why. Thanks.

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Replying to Justin Bryant:
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By richard thomas
04th Dec 2023 17:22

Noting that you haven't in fact answered my question, I cannot see anything in paras 326 or 329 that I now think are wrong. Bear in mind the circumstances of those clearly obiter remarks - I was commenting on KG's hopeless application to exclude great chunks of HMRC's evidence, not on the validity of the DA.

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Replying to Justin Bryant:
By Ruddles
04th Dec 2023 20:03

Given that I only think that I understand what you were trying to say, and that Richard is even less certain, it might be helpful for you to confirm exactly what your point was.

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Replying to Ruddles:
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By Justin Bryant
05th Dec 2023 09:09

I similarly don't understand RT's point, so let's call it quits (he's at least answered my paras 326 & 329 question)! (If you simply read my above question literally (without assuming I'm dumb) it makes sense and concerns only the point made by RT in paras 326 & 329 (that I'm not disagreeing with) - I can't make it any clearer than that.)

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Replying to Justin Bryant:
By Ruddles
05th Dec 2023 11:08

Justin Bryant wrote:
I can't make it any clearer than that.)

Yes you can. Simply saying that it makes sense doesn't help at all. A literal reading of your words does not support your conclusion. I have therefore had to assume that you meant to say something else. That assumption may or may not be valid, which is why I asked for clarification. If you're too busy to provide that, fair enough.
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Replying to Ruddles:
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By More unearned luck
05th Dec 2023 18:35

In making the discovery the officer of the Board in s 29(1) must act 'honestly and reasonably' (per the UT in both Charlton and Tooth). If Justin was right that obligation to be honest and reasonable wouldn't extend to a requirement by the officer to make any assessment of the chances that the bad conduct required by s 29(3) and s 36 can be proved, which seems daft. Why waste everyone's time and cause distress to the taxpayer by making an assessment that has no chance of being held to be valid? Of course, Being daft doesn't mean that its not the law. And I'm sure that HMRC's rules require some prior consideration of what bad conduct can be proved, even if its of the type described by the FTT in Tooth as playing all the right notes in the wrong order.

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Replying to Justin Bryant:
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By Justin Bryant
07th Dec 2023 11:07
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By Justin Bryant
05th Dec 2023 10:45

As for DN's view that P118's s162 planning "defaults your mortgage", that's laughable for being far too simplistic, as you have to consider the following basic points (as with any purported breach of contract) per standard textbooks on contract law (mortgages are not treated any differently as far as I'm aware and I've never heard of a mortgage actually "defaulting" as per DN under P118's planning, nor for any such nominee/trustee property owner where the property's beneficial ownership has transferred with or without the mortgagee's knowledge).

A repudiatory breach of contract, if so treated by the innocent party, brings the contract to an end. In general, both parties are released from further performance of outstanding obligations, but the innocent party will be entitled to damages. Whether a breach is repudiatory depends on whether it goes to the root of the contract (Federal Commerce and Navigation Co Ltd v Molena Alpha [1979] AC 757).
Contractual terms were traditionally divided into conditions (any breach of which entitled the other party to treat the contract as at an end) and warranties (breach of which only gave the innocent party a remedy in damages). However, a third category emerged: the innominate or intermediate term. The remedy for the breach of such a term depends on the nature and effect of the breach. If the breach deprives the innocent party of "substantially the whole benefit which it was the intention of the parties as expressed in the contract that it should obtain" (Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26), then he is entitled to treat the breach as a repudiation, and terminate the contract.
If a contracting party's obligation is "entire", any breach will disentitle him from claiming any partial consideration or compensation in exchange from the innocent party (Cutter v Powell (1795) 6 TR 320).
It is possible for certain rights of the party in default to survive the termination of the contract. It is a question of construction whether this was the intention of the parties. See Chitty on Contracts (Sweet & Maxwell 32nd ed, 2015), at paragraph 24-050.

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By Justin Bryant
13th Feb 2024 18:18

The latest here from DN is amusing: https://taxpolicy.org.uk/2024/02/12/lt4l_fraud/

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