HMRC has warned landlords to stop using a tax avoidance scheme promoted as a way to reduce property tax bills by bypassing mortgage interest relief restrictions.
The arrangement, described as a hybrid business model, involves transferring rental properties into a limited liability partnership (LLP) with a corporate member. Promoters claim this allows landlords to claim larger deductions for mortgage interest and move profits into the company, where corporation tax applies instead of higher or additional rate income tax.
HMRC says the scheme does not work and carries a significant risk. It has warned landlords who use it could end up paying more tax than they tried to avoid, as well as interest, penalties and promoter fees.
The tax authority said the arrangement breaches mixed-member partnership rules under sections 850C and 850D of the Income Tax (Trading and Other Income) Act 2005. Where excess profits are allocated to the corporate member, they can be reallocated to the individual landlords.
HMRC also pointed to anti-avoidance rules under section 809AAZA of the Income Tax Act 2007. These can treat rental income transferred to another person or structure as still belonging to the landlord.
The warning, issued in HMRC’s Spotlight 63a, also notes that stamp duty land tax may apply when properties are transferred and when profit shares change.
Landlords already involved should speak to an independent tax adviser or accountant as soon as possible. HMRC said it can help taxpayers exit these arrangements and get their tax affairs back on track.
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