Buy to let landlords caught in £50m tax avoidance scheme
The scheme is likely to have resulted in up to £50m of tax avoidance by breaking tax rules by using a hybrid partnership structure, and has attracted hundreds of landlords, looking to cut their tax bills.
Less Tax 4 Landlords Ltd runs the scheme, which sees landlords set up a limited company to hold the properties and then transfer their properties to a limited liability partnership (LLP) which allocates profits to members, thereby avoiding tax.
The scheme means the landlords can bypass mortgage interest relief restrictions allowing increased deductions for mortgage interest, reduce the tax payable on profits generated by the property business and reduce capital gains tax (CGT) payable when properties are sold.
As a result landlords pay less tax as the transaction relating to the contribution of properties to the LLP has no upfront tax cost and the properties’ base costs (the amount that can be set against the sale price of an asset when calculating CGT) are uplifted to their market value at the date of transfer for CGT purposes.
Under the LLP arrangement, the landlords remain basic rate taxpayers meaning they are not impacted by finance cost restrictions and the corporate member can claim a full deduction for its share of finance costs as finance cost restrictions do not apply to it.
The corporate member is subject to corporation tax on its net profit share instead of paying higher or additional income tax rates that would apply if the profits had been allocated to the landlords.
In addition, business property relief (BPR) can be claimed in respect of a hybrid structure carrying on a property rental business resulting in no inheritance tax being due, if the landlords die.
Tax expert Dan Neidle of Tax Policy Associates said: ‘They’ve sold hundreds of landlords a “hybrid partnership” structure which is supposed to avoid income tax, capital gains tax, stamp duty land tax and inheritance tax. It’s flown under HMRC’s radar, and so avoided about £50m in tax to date.’
HMRC said: ‘If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs. You can do this by emailing HMRC at spotlight63@hmrc.gov.uk and we will tell you what further information we require.’
In a statement on the Less Tax 4 Landlords website, the company said: ‘We are currently contacting HMRC regarding the recent publication of new guidance on their website for hybrid partnership arrangements, a type of structure that LT4L use with some of our clients.
‘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 company has stopped accepting new clients for the scheme while it waits for a response from HMRC.
Scheme promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within five days of the scheme being made available or implemented. The initial penalty is up to £600 a day. If this is not considered to be a sufficient deterrent promoters may have to pay a penalty of up to £1m.
HMRC warned that this scheme does not work as the arrangements break the following tax rules:
mixed member partnership legislation contained in Income Tax (Trading and Other Income) Act 2005, section 850C and s850D, which details how excess profits of a corporate member of an LLP are reallocated to individual members;
disposal of income streams through partnerships anti-avoidance legislation contained within Income Tax Act 2007, Chapter 5AA, s809AAZA, which applies to charge the corporate members’ income on the transferor of the income stream (the landlord);
Taxation of Chargeable Gains Act 1992 S59A, which treats any dealing in chargeable assets by an LLP as by the individual members — LLPs are transparent for tax purposes so members own a fractional share of assets, and this means the base cost of properties are unchanged following their introduction to the LLP;
a property rental business is likely to be within the exclusions from BPR of ‘making or holding investments’ under the Inheritance Tax Act 1984, s105(3).