HMRC cracks down on landlord tax scheme loopholes

There is usually a catch if a tax-saving strategy sounds too good to be true.

That is the warning that HMRC has issued to landlords, as they urge them to avoid hybrid business model schemes.

These arrangements are often marketed as clever ways to reduce your tax bill, but the consequences of getting involved can be far more costly than any promised savings.

HMRC are now keeping a close eye on these schemes and you need to be sure you are remaining compliant.

What is the scheme?

The hybrid business model is pitched as a way to reduce your tax liabilities by restructuring how rental profits are reported.

Landlords will usually set up a Limited Liability Partnership (LLP) that includes themselves and a corporate member (usually a limited company).

Properties are then transferred into the LLP and profits are distributed between the members in a way that supposedly minimises tax.

Instead of being taxed at higher or additional Income Tax rates at 40 per cent or 45 per cent, a portion of the profits will be allocated to the corporate member and they will pay Corporation Tax at a lower rate.

Many promoters also claim that this setup allows landlords to bypass restrictions on mortgage interest relief.

Although this may appear efficient on paper, HMRC has made it clear that these claimed advantages do not hold up.

HMRC are clearing up the risks

HMRC have been clear that these schemes breach existing tax legislation, particularly rules made to prevent profit shifting between individuals and companies.

The mixed member partnership rules ensure that profits allocated to a corporate partner are reassigned back to the individual landlords if there is no genuine reasoning.

HMRC have also noted that even if income is routed through another structure, it can still be taxed as the landlord’s personal income.

The further risks of property transfers into LLPs or companies are that they can trigger Stamp Duty Land Tax (SDLT) and potential Capital Gains Tax (CGT) implications.

These costs are something that promoters often downplay or ignore.

What happens if you fail to remain compliant?

HMRC want you to know that these schemes are high risk and likely to fail under scrutiny.

If you are using or even debating the use of them, you need to steer clear.

Otherwise, you could be at risk of non-compliance and face:

• A demand to repay the full amount of tax avoided
• Interest charges on unpaid tax
• Penalties
• A formal tax investigation

Promoters of the scheme are also on HMRC’s radar and could face fines up to £1 million.

How can we help keep you compliant?

Sticking with these schemes could leave you paying more than you originally hoped to have saved and the risks are just not worth it.

HMRC is offering some advice to landlords who are already involved in this scheme or have been approached to use it to speak to a qualified accountant.

Our professional team can cut through the marketing jargon and assess whether a tax-saving strategy is compliant with UK tax legislation.

We don’t want you to face any hefty penalties, so any advice we give on staying tax-efficient will be fully compliant.

If you need further advice or support with keeping your taxes compliant, get in touch.