HMRC Alert on LLP Mortgage Interest Tax Avoidance Schemes

On October 4, 2023, HMRC issued an important alert that property landlords and individuals with property rental businesses should pay close attention to. This alert, known as “Spotlight 63,” shines a red light on tax avoidance schemes namely, Less Tax for Landlords and Property 118 that have been making rounds in the buy-to-let property industry. These schemes involve transferring property businesses to a unique type of Limited Liability Partnership (LLP) – often referred to as a “hybrid” LLP due to its incorporation of corporate members. The primary goal of this scheme is to sidestep mortgage interest relief restrictions and secure significant tax reductions on profits, Capital Gains Tax (CGT), and even inheritance tax. These scheme promoters have sold many hundreds of tax avoidance schemes to UK landlords and HMRC will now go after landlords who have been a victim of such schemes to recover unpaid taxes.

Professional HMRC Tax Litigation Advice

Our tax barristers and solicitors provide the very best representation in negotiations, throughout the HMRC internal review process and in front of the Tax Tribunal. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect including developing a strategy. Our ex-HMRC team provide advice in relation to:

  • Appealing against a tax assessment;
  • Appealing against a tax penalty;
  • Negotiating with HMRC;
  • Navigating the HMRC internal review process; and
  • Advising on statutory tax appeals within the Tax Tribunal.

If you want to challenge a decision made by HMRC, we can help you understand the issues raised, gather necessary information, and ensure a comprehensive and accurate response to HMRC. Just book an initial conference with our leading tax counsel (former HMRC in-house tax barrister and Head of Indirect Tax Litigation at Deloitte and National Tax Litigation Director at PWC) and our Senior Partner who worked at KMPG, Goldman Sachs and ING Barings and is dual-qualified as a Barrister and Solicitor-Advocate. Both lawyers will be available to you at the outset in your first advice conference.

Understanding the Scheme

At its core, these schemes unfold when property landlords, or individuals with property rental businesses, establish a Limited Liability Partnership (LLP) that includes a corporate member. This corporate member is often set up by the landlords themselves or their family members. The properties owned by the individual landlords are then transferred to this newly formed LLP and the profits generated by the LLP are consequently allocated in a discretionary manner. The primary aim is to ensure that the individual landlords remain classified as basic rate taxpayers, while the surplus profits are directed to the corporate member.

The scheme promoters claim that property landlords can enjoy a series of tax advantages under these arrangements that include the following:

  • No Upfront Tax Costs: Property transfer to the LLP is touted as having no initial tax costs. Additionally, the base costs of these properties are uplifted to their market value at the time of transfer. This arrangement claims to be designed to minimise future Capital Gains Tax (CGT) obligations upon property sales.
  • Basic Rate Taxpayer Status: The tax status of individual landlords as basic rate taxpayers is said to be preserved, effectively avoiding the impact of finance cost restrictions.
  • Full Finance Cost Deductions: The corporate member within the LLP is advertised to be able to claim full deductions for finance costs, such as mortgage interest. Unlike individual landlords, finance cost restrictions do not apply to corporate members.
  • Corporation Tax Advantages: The corporate member is subject to Corporation Tax on its net profit share. This often results in a lower tax rate compared to the higher or additional income tax rates that would be applicable to individual landlords but it does not apply in most cases.
  • Inheritance Tax Relief: In some cases, Business Property Relief (BPR) can be claimed for the hybrid structure, resulting in no Inheritance Tax being due when landlords pass away but there are several hurdles that need to be avoided to make that happen.

HMRC Spotlight 63: What It Means for Landlords

Spotlight 63 is a wake-up call for property landlords and individuals involved in property rental businesses. HMRC has raised significant concerns about the compliance and legality of these tax avoidance schemes. Specifically, in the scheme, Less Tax for Landlords, a Limited Company is incorporated but the property ownership is never transferred to the Limited Company in order to avoid Capital Gains Tax and Stamp Duty Taxes. Additionally, the tax avoidance scheme promoters advertise setting up a partnership, a Limited Liability Partnership to keep landlords as Basic Rate Taxpayers so that they are not subject to Section 24 of the Finance Act 2015 changes. In accordance with this scheme, the mortgage payments are to be reimbursed by the Limited Company to the landlords. HMRC’s view on these schemes is clear: it does not achieve the promised tax savings; it is a failed tax planning strategy. HMRC contends that these schemes fall under various anti-avoidance legislations. These include:

  • Mixed Member Partnership Legislation: This legislation reallocates any excess profits of a corporate member within a hybrid LLP back to individual members.
  • Disposal of Income Streams through Partnerships Rules: These rules ensure that the income of the corporate member is charged to the transferor of the income stream, in this case, the landlord.
  • Taxation of Chargeable Gains Act: According to this act, dealings in chargeable assets by an LLP are treated as if they were made by individual members. This means that the base cost of properties remains unchanged following their contribution to the LLP.
  • Business Property Relief (BPR) Exclusions: HMRC maintains that a property rental business is likely to fall within the automatic exclusion for “making or holding investments” under inheritance tax law. The use of the hybrid business model does not alter the availability of this relief.

Therefore, it’s crucial for those who may have engaged in these arrangements to take immediate action. If you believe that you have been a victim to such a scheme or wish to mitigate any future concerns with the HMRC, we advise voluntary disclosure, under the supervision and expertise of our solicitors, to initiate negotiations of penalties or liabilities.

HMRC Voluntary Disclosure Opportunity (VDO)

In order to allow companies and individuals a way out of their financial predicaments when it comes to taxation, the HMRC runs campaigns to encourage individuals with undeclared income to voluntarily disclose their financial information to settle tax matters. In return, HMRC offers leniency on penalties. These campaigns target various industries, such as electricians, doctors, and landlords, aiming to bring tax affairs up to date and prevent future errors.

Current campaigns include:

  • Credit Card Sales Campaign, focusing on undeclared income from card transactions,
  • Let Property Campaign, allowing landlords to disclose rental income.
  • The Worldwide Disclosure Facility is available for offshore tax issues.

Benefits of voluntary disclosure include avoiding harsh penalties and investigations. HMRC uses various means to detect non-compliance, making professional legal advice crucial.

How can a Tax Disputes Law Firm help?

Navigating the complexities of property business arrangements involving hybrid partnerships and tax planning schemes as highlighted in Spotlight 63 requires expert legal guidance. Our specialist Tax Solicitors and Barristers possess expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability. We specialise in providing tailored solutions for property landlords, ensuring compliance with HMRC regulations while optimising your tax position.

Our experienced team can assist you in:

  • Ensuring Compliance: We stay up to date with the latest tax regulations and will help ensure your business remains compliant with HMRC’s guidelines.
  • Strategic Planning: We’ll work closely with you to develop a strategic tax plan that aligns with your business goals, optimising your tax efficiency.
  • Risk Mitigation: Identify potential risks and address them proactively, protecting your business from unexpected tax liabilities.
  • Audit Representation: If your property business faces an audit, our legal representation will ensure a fair assessment of your tax position.

HMRC assesses penalties based on factors like lost revenue, taxpayer behaviour, and disclosure promptness. Our legal team can help negotiate penalties with HMRC. Disclosing financial information voluntarily is advised, as HMRC may impose harsher penalties later. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC and defending all forms of HMRC fraud, tax inquiry, tax fraud investigation, criminal tax evasion and HMRC enquiries and investigations. Our team specialises in successfully challenging HMRC decisions and will assist you in every aspect of the investigation.

We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results. Just call us on 0207 1830 529, or email [email protected].

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