HMRC has raised an alarm over a controversial tax planning strategy, often presented as a ‘hybrid business model’, targeted towards individual landlords seeking to restructure their property business. The scheme allegedly promises significant tax reductions by:
- Circumventing mortgage interest relief restrictions, leading to increased mortgage interest deductions.
- Diminishing the tax due on property business profits.
- Lowering Capital Gains Tax when properties are divested.
- Reducing Inheritance Tax upon death.
HMRC has categorically stated, “this scheme does not work,” cautioning that those opting for such strategies could end up shouldering more than the tax they aimed to evade, accompanied by interests, penalties, and hefty fees for utilising these setups.
Explaining the purported workings of the scheme, HMRC’s post elucidated, “The arrangements aim to dodge tax by letting individual or joint property landlords transfer their properties to a limited liability partnership (LLP) with a corporate member. The LLP then designates profits selectively to its members.”
However, HMRC contends that these schemes are fundamentally flawed, as they contravene a series of legislations, including the mixed member partnership legislation, disposal of income streams through partnerships anti-avoidance legislation, and the Taxation of Chargeable Gains Act 1992, among others.
Colby Short, the CEO of GetAgent.co.uk, remarked, “Those utilising these schemes are advised of reduced taxes owing to several factors, including: absence of upfront tax costs during the contribution of properties to the LLP, landlords remaining as basic rate taxpayers, and the corporate member’s exemption from finance cost restrictions.”
If you find yourself embroiled in such a scheme, HMRC urges you to extract yourself and rectify your tax status. They recommend reaching out to them at spotlight63@hmrc.gov.uk for guidance on the next steps. Those dubious about their current tax arrangements should also consider seeking independent tax counsel or contacting tax charities like TaxAid.
The onus also falls on scheme promoters. They are mandated by the disclosure of tax avoidance schemes (DOTAS) legislation to declare any such arrangements they’re peddling to HMRC. Non-compliance could incur severe penalties. HMRC warns, “Promoters might be slapped with a fine of up to £600 a day, and in extreme cases, up to £1 million.”
HMRC retains the right to publicise data regarding tax evasion strategies and those propelling them. They have committed to taking stringent actions against anyone promoting or endorsing tax evasion, utilising penalties against those who facilitate the adoption of such debunked tax evasion setups.
Lastly, HMRC encourages the public to report dubious tax schemes or promoters through their tax fraud or avoidance online platform, ensuring anonymity for those hesitant to provide personal details.
