HMRC have recently published a spotlight warning landlords to avoid schemes offering hybrid property arrangements that purport to save tax. HMRC’s view is that the scheme does not work and landlords who are tempted by the advertised advantages might find themselves out of pocket.
Nature of the arrangements
The arrangements are based on the landlord or joint owners of the property transferring their property to a limited liability partnership (LLP) with a corporate member. The LLP allocates profits to members on a discretionary basis.
An LLP is a body corporate under the Limited Liability Partnership Act 2000. An LLP benefits from the flexibilities available to partnerships with the added advantage of limited liability for members.
Under the scheme:
The scheme claims that by using a hybrid business model, landlords can:
The scheme would be caught by existing tax legislation, meaning that the perceived advantages will not materialise. Landlords taking part in arrangements such as these may end up paying interest and penalties on top of the tax that is due, and also fees to the scheme promoter.
HMRC advise landlords who may have become involved in the scheme to withdraw from it and to settle their tax affairs. They should contact HMRC to make a disclosure. They may also want to take independent professional advice.
Scheme promoters must comply with the disclosure of tax avoidance scheme (DOTAS) legislation and ensure that they advise HMRC of any arrangements that they are marketing. Promoters are liable to penalties if they fail to disclose a scheme which falls within the scope of the DOTAS legislation. Penalties are severe, with initial penalties of up to £600 per day and possible penalties of up to £1 million.
Partner note: Spotlight 63 – Property business arrangements involving hybrid partnerships (see www.gov.uk/guidance/property-business-arrangements-involving-hybrid-partnerships-spotlight-63).
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