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.
Following the new guidance from HMRC, the NRLA recently reported that it had suspended its partnership with Less Tax 4 Landlords Limited — a tax and estate planning consultancy firm — which used the hybrid partnership arrangements with some of its clients.
On Friday (6th October), the landlord association issued a statement with regard to its relationship with the company: “In recent weeks, we have become aware of speculation concerning business structures promoted by one of the NRLA’s commercial partners, Less Tax 4 Landlords Limited.
“Less Tax 4 Landlords is an appropriately qualified and affiliated firm and part of a group regulated by the FCA and SRA, respectively.
“However, we have a duty to ensure that all companies promoted to the NRLA membership offer the highest quality and level of service.
“As such, while we investigate these claims, we have suspended partnership activity with Less Tax 4 Landlords.”
Less Tax 4 Landlords said it was contacting HMRC with regard to the new guidance.
“The implication is that there is a requirement to register with HMRC under DOTAS, and we are currently looking to clarify our position to ensure that we remain compliant at all times,” the business said in a statement on its website.
“As a company, we are committed to providing the best possible service and we are doing everything we can to obtain the full picture, at which point we will advise further.”
HMRC has issued advice for anyone concerned about the schemes they are currently using.
Narinder Gill, associate at Coreco, commented: “This is a very interesting and concerning statement released by HMRC.
“[The many] landlords who have operated their portfolio under this capacity need to seek appropriate tax advice and rectify their tax affairs as a matter of urgency.
“There have been so many different tax saving schemes mooted by tax advisers since the abolition of section 24, and we need for HMRC to ensure that their position is clear with no grey areas.
“This statement goes a long way in clarifying tax liabilities in alternative structures for landlords, as well as the promotion of these by tax advisers.”
Howard Levy, head of BTL lending at broker SPF Private Clients, commented: “With any scheme, lenders need to be able to see clearly that there won’t be any issues going forward.
“The possibility of a large tax bill further down the line usually means lenders won’t be happy with such a company structure. Having tiered company levels and with different types of companies — LLPs, Limited Companies, even trading companies — makes the lending more complicated, which again many lenders would shy away from.
“Lenders also often require an accountant to confirm the advice they are giving on the company structure meets HMRC requirements and if HMRC haven’t confirmed that the route of ownership would fit the taxation rules, it’s unlikely that lenders would proceed.”
