HMRC warning buy-to-let landlords of scheme which involves hybrid partnerships and possible tax avoidance
HMRC is cautioning buy-to-let property owners against using a tax avoidance scheme that seeks to reduce tax payable on rental profits. The scheme, operated by Less Tax 4 Landlords Ltd, involves landlords setting up a limited company to hold their properties and then transferring them to a limited liability partnership (LLP) structure to allocate profits to members, thus minimising their tax obligations.
This arrangement allows landlords to bypass restrictions on mortgage interest relief, reduce taxes on property business profits, and decrease capital gains tax when properties are sold.
The described arrangements operate in the following manner:
This arrangement offers potential tax savings for landlords for the following reasons:
HMRC has warned that this scheme breaks several tax rules, including mixed member partnership legislation, anti-avoidance legislation for income stream disposals through partnerships, and tax treatment of chargeable gains. The scheme has attracted hundreds of landlords, potentially resulting in up to £50m in tax avoidance.
HMRC advises those using this or similar schemes to withdraw and settle their tax affairs, emphasising that penalties may apply for non-disclosure. Scheme promoters may also face significant penalties. Less Tax 4 Landlords Ltd has halted accepting new clients for the scheme while seeking clarification from HMRC.
Read HMRC’s view of the arrangements, which was published on 4 October 2023.