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Beware property PM partnerships involving hybrid arrangements

22 Dec 2023 | BY Claire Critchley

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 individual landlord or their family members, or both, set up a limited company;
  • the individual landlords set up an LLP alongside the limited company, which is considered to be the corporate member of the LLP;
  • the individual landlords transfer their properties to the LLP;
  • the members of the LLP (comprising the individual landlords and the corporate member) allocate the profits of the LLP on a discretionary basis ensuring that the individual members remain basic rate taxpayers and the remaining profits are allocated to the corporate member;
  • the corporate member claims a deduction for any mortgage interest and finance costs.

Claims

The scheme claims that by using a hybrid business model, landlords can:

  • escape the rules restricting mortgage interest relief for unincorporated landlords letting residential property, securing increased deductions for mortgage interest relief;
  • reduce the tax payable on the profits of the property income business;
  • reduce capital gains tax payable on any gain when the property is sold; and
  • reduce the inheritance tax payable on the landlord’s death.

Dangers

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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