HMRC has warned landlords and property investors of a marketing scheme that claims to offer tax efficiencies by transferring properties to a limited liability partnership (LLP) with a corporate member.
In guidance published last week HMRC have warned that such scheme do not work, warning “people who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.”
They warn of “hybrid business model” schemes which sees individual or joint properties transferred to an LLP which then allocated the profits on a discretionary basis to members, and claims to offer the ability to
- bypass mortgage interest relief restrictions allowing increased deductions for mortgage interest
- reduce the tax payable on profits generated by the property business
- reduce Capital Gains Tax payable when properties are sold
- reduce Inheritance Tax payable on death
The arrangements see individual set up limited companies alongside an LLP, wherein the limited company is considered the corporate member. The properties are transferred to the LLP and profits are allocated on a discretionary basis tot make sure that individual members remain basic rate taxpayers and the remaining profits are allocated to the corporate member.
However, citing income tax liabilities, and taxation of chargeable gains, alongside issues with inheritance tax legislation, HMRC has issued guidance warning landlords and property investors to steer clear and advised those already involved to extricate themselves quickly.
“Property business arrangements involving hybrid partnerships” can be read in full here
