HMRC declares tax planning option for landlords ineffective

HMRC is aware of a tax avoidance scheme being marketed as a tax planning option for property landlords. This scheme is sometimes referred to as a hybrid business model and claims to bypass mortgage interest relief restrictions, reduce the tax payable on profits and reduce capital gains tax and inheritance tax. The scheme involves setting up an LLP, of which the individual landlords are members, and a company, which is also a member of the LLP. The members then agree to allocate profits in such a way that the individuals are basic rate taxpayers, thereby being unaffected by the mortgage interest restrictions, and the company is allocated the balance which in theory is taxed at corporation tax rates.

However, HMRC has confirmed that such arrangements do not work as the tax advantages fall foul of several pieces of legislation; the most obvious one being the mixed member partnership legislation, which reallocates excess profits of a corporate member back to the individual. 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 contact HMRC to do so, or seek professional tax advice.

Further information on the scheme and how to contact HMRC can be found here.