Tax avoidance schemes – Landlords beware!

21 March 2024

Property Investors & Developers

There has been much noise in the property world in recent months regarding the likes Property 118 and Less Tax 4 Landlords.

Those taxpayers who have taken the advice of such companies may now face significant tax liabilities and penalty charges, as HMRC have begun investigating.

What has happened?

HMRC have issued DOTAS (Disclosure of Tax Avoidance Schemes) numbers for the arrangements promoted by both of the above companies – 2 in the case of Property 118.

This means that the schemes are on HMRC’s radar, and they will be investigating further.

There are also potentially issues with mortgage providers.

The arrangements discussed below both involve transferring beneficial interest of the properties to a company or LLP, which may not be made transparent with mortgage providers and could be in breach of mortgage terms.

Less Tax 4 Landlords

This company promotes a hybrid structure, making use of mixed LLPs – essentially the landlord creates an LLP and at the same time forms a limited company that is partner in this LLP, along with the landlord himself.

The property portfolio is beneficially transferred to the LLP, with a large portion of the rents being allocated to the corporate partner.

What does this mean?

The idea is that the corporate partner enjoys lower tax rates (19%-26.5% corporation tax rather than 40%-45% income tax) as well as enjoying full relief for mortgage interest.

It also promises the inheritance tax benefits of securing Business Property Relief (BPR – only available to trading companies), by suggesting that because the company doesn’t hold the rental properties directly, but instead through the LLP, it qualifies for BPR.

Sounds like a good idea?

Not at all.

Late last year HMRC issued Spotlight 63 confirming this type of hybrid arrangement does not work.

Taxpayers who have followed this advice and set up such a scheme may now be subject to significant capital gains tax, income tax and stamp duty land tax and potentially inheritance tax liabilities.

Property 118

The structure that this company promotes is perhaps a little more complex.

They advise on incorporating a property partnership into a limited company and making use of Section 162 Incorporation Relief .

What does this involve?

The planning involves exchanging contracts with the company, but not fully completing immediately, thereby dubbing the term Substantial Incorporation Structure (SIS).

There is also the use of a short-term bridging loan in order to create a director’s loan account in a circular fashion, from which the taxpayer can withdraw cash from the company tax free.

Tax Free and HMRC?

HMRC have recently issued 2 DOTAS numbers in respect of Property 118 – one for the SIS and the other for the creation of the director’s loan.

Late last year, HMRC began issuing ‘nudge letters’ to those who incorporated their property portfolio in 2017/18 and claimed S162 Incorporation Relief on their self-assessment tax return.

HMRC suggest that the taxpayer may have claimed too much tax relief and invite them to amend their claim.

What will HMRC do going forwards?

It’s probable HMRC will continue issuing nudge letters for more recent tax years in due course.

2017/18 is the earliest HMRC can enquire into under the 6-year rule.

However, when deliberate avoidance is suspected upon further investigation, they can go back up to 20 years.

As with Less Tax 4 Landlords, users of the arrangement promoted by Property 118 may now face large capital gains tax and stamp duty liabilities.

I think I may be involved in a tax avoidance scheme – what do I do?

Please get in touch!

We have a team of specialised property tax advisers ready to help you put things right.

We can assist on liaising with HMRC to rectify your tax position, and advise on how to structure your affairs ongoing in order to remain compliant, but also be tax efficient.

As always, it’s best to approach HMRC before they approach you – penalties will be lower that way.

Received a letter?

If you’ve received a ‘nudge’ letter from HMRC and aren’t sure how to proceed, please get in touch.

Just because you’ve received a letter, it doesn’t necessarily mean you’ve done anything wrong, but it’s vital you contact HMRC promptly to prevent them opening a full enquiry into your affairs.