HMRC issues a spotlight article on hybrid partnerships

HMRC issues a spotlight article on hybrid partnerships

10:00 AM, 5th October 2023, About 8 months ago 6

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We have written many articles about Hybrid LLP’s and how they have been abused.

We also offered to help those who had fallen for a Hybrid LLP sales pitch to come clean with HMRC and correct matters before HMRC came knocking at their door.

Today, HMRC issued Spolight article saying …

Find out about a scheme used by individual landlords to avoid paying tax on their property income and reduce Capital Gains Tax and Inheritance Tax.

HMRC is aware of a scheme being marketed as a tax planning option available to individual property landlords to structure their property business. Sometimes referred to as a hybrid business model, the arrangement claims 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

HMRC’s view is that this scheme does not work. People who use these arrangements may have to pay more then the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.

How the arrangements claim to work

The arrangements seek to avoid tax by allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a corporate member. The LLP then allocates profits on a discretionary basis to members.

The arrangements are claimed to work as follows:

  1. The individual landlords or their family members, or both, set up a limited company.
  2. The individual landlords set up an LLP alongside the limited company — the limited company is considered the corporate member.
  3. The individual landlords transfer their properties to the LLP.
  4. The members of the LLP (the individual landlords and corporate member) allocate the LLP profits to themselves on a discretionary basis to make sure that:
    • the individual members remain basic rate taxpayers
    • the remaining profits are allocated to the corporate member
  5. The corporate member claims a deduction for finance costs (such as mortgage interest) relating to the properties.

Landlords are advised that this arrangement results in less tax being payable for the following reasons:

  • the transaction relating to the contribution of properties to the LLP has no upfront tax cost and the properties’ base costs (the amount that can be set against the sale price of an asset when calculating Capital Gains Tax) are uplifted to their market value at the date of transfer for Capital Gains Tax purposes
  • the landlords remain basic rate taxpayers meaning they are not impacted by finance cost restrictions
  • the corporate member can claim a full deduction for its share of finance costs as finance cost restrictions do not apply to it
  • the corporate member is subject to Corporation Tax on its net profit share instead of paying higher or additional income tax rates that would apply if the profits had been allocated to the landlords
  • calculating the capital gain using an uplifted base cost at the date the properties are contributed to the LLP reduces the Capital Gains Tax paid compared to using the original purchase and improvement costs, if the properties are sold
  • Business Property Relief (BPR) may be claimed in respect of a hybrid structure carrying on a property rental business resulting in no Inheritance Tax being due, if the landlords die

HMRC’s view of the arrangements

HMRC’s view is that this scheme does not work as the arrangements are primarily caught by:

  • mixed member partnership legislation contained in Income Tax (Trading and Other Income) Act 2005, S850C and S850D, which details how excess profits of a corporate member of an LLP are reallocated to individual members
  • disposal of income streams through partnerships anti-avoidance legislation contained within Income Tax Act 2007, Chapter 5AA, S809AAZA, which applies to charge the corporate members’ income on the transferor of the income stream (the landlord)
  • Taxation of Chargeable Gains Act 1992 S59A, which treats any dealing in chargeable assets by an LLP as by the individual members — LLPs are transparent for tax purposes so members own a fractional share of assets, and this means the base cost of properties are unchanged following their introduction to the LLP
  • a property rental business is likely to be within the exclusions from BPR of ‘making or holding investments’ under the Inheritance Tax Act 1984, s105(3) — the use of the hybrid business model does not change the availability of such relief

Reference: https://www.gov.uk/guidance/property-business-arrangements-involving-hybrid-partnerships-spotlight-63

 


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Comments

aydin

10:58 AM, 5th October 2023, About 8 months ago

May we please also have your comments on the information in this publication
https://www.taxpolicy.org.uk/2023/09/13/property118/?utm_source=substack&utm_medium=email
I received this through a mail in September, I have not seen any comments on this site to this widely shared information about this site and the advice sponsored
Furthermore, they have prepared a report on your schemes and I was sent a link and read the report.

Churchills Tax Advisers

12:54 PM, 5th October 2023, About 8 months ago

It has to be said that in over 35 years in practice I have never had an enquiry regarding a hybrid/mixed partnership. There may be an increased risk in relation to 'a scheme being marketed', but only where there are significant portfolios involved.
The problem with any marketed arrangements (including Property 118/Chiltern) is that the more widely marketed the arrangements are the more risk of them popping up on HMRC's radar and HMRC deciding to do something about it to protect tax revenues. The same has happened in the past with film partnerships, SDLT arrangements, employee loan arrangements, etc. Once the tax at stake becomes unacceptable HMRC is compelled to act.

Michael Booth

16:02 PM, 5th October 2023, About 8 months ago

Just pay ya tax and stop all the nonesence, been a prs landlord for 25years its not worth all the hassle .

Reluctant Landlord

16:17 PM, 5th October 2023, About 8 months ago

Reply to the comment left by Michael Booth at 05/10/2023 - 16:02
move on 25 years and flip this around...because the PRS is now public enemy number 1, LL's are looking at ways of trying to secure as much income as possible. Paying tax is inevitable, but that does not assume you have to pay more than you legally required to do!

JaSam

8:00 AM, 6th October 2023, About 8 months ago

Looks like Dan is after this structure also..

https://www.taxpolicy.org.uk/2023/10/05/lt4f/

Stella

11:59 AM, 6th October 2023, About 8 months ago

Reply to the comment left by JaSam at 06/10/2023 - 08:00
Am I correct in assuming that there are no problems with an LLP that is not a hybrid LLP

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