Hybrid Tax Structure – Landlords BEWARE!

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The “Hybrid LLP structure” is nothing new. In simple terms it’s a mixed partnership, whereby one or more of the partners is a Limited Company.

Property118 very rarely recommend “Mixed Partnerships”, i.e. an LLP with a Corporate Member for the following reasons:-

  1. Mortgage Lenders do not like Mixed Partnerships – Paragon Mortgages lending criteria specifically precludes lending to them.
  2. The advantages of being able to transfer income to a corporate Member of an LLP in order to facilitate a lower rate of tax on retained profits has been legislated against year after year for over a decade by HMRC. Un Upper Tier Tax Tribunal won by HMRC created case law in Feb 2020 – details via THIS LINK
  3. Mortgage liabilities cannot be transferred to a Corporate Member of an LLP without transferring the underlying assets at either legal or beneficial ownership level. These transfers trigger Capital Gains Tax, because mortgage liabilities cannot be offset against the transfer of legal or beneficial ownership and there is no ‘incorporation relief’ either, unless the ‘whole business’ is transferred and all other eligibility criteria for incorporation relief are also met.

However, the “Hybrid structure” is touted by some advisers as a ‘one-size-fits-all’ solution to the issues associated with finance cost relief and inheritance tax and could very easily result in people falling foul of HMRC’s anti-avoidance legislation.

One example is the “Transfer of Income Streams” legislation under The Finance Act 2009 schedule 25 – please see the link below.


To summarise the legislation; if you transfer part or all of an income stream without also proportionately transferring the underlying business assets any tax advantage is negated.

You should also see the legislation at https://www.gov.uk/government/publications/mixed-membership-partnership-aifms-and-asset-disposal-rules-legislation-day-technical-note-and-guidance/partnerships-a-review-of-two-aspects-of-the-tax-rules, which I have reproduced below.

1.3.1 Tax-motivated allocation of business profits and losses in mixed membership partnerships

The appropriate notional consideration for services (S850C (15))

This is the arm’s length value of any services provided by that member for the period, less any other amount received for those services (for example, a service fee) that is not part of the profit share.

In most cases, this notional consideration should be no more than the cost to the company in providing the services plus a modest mark-up.

If any services provided involve other members of the partnership, then the value of these services is not included in arriving at the notional return (Section 850C(17)).

Example 4This example shows how there is no notional consideration for services when the services involve other partners.

Continuing with example 3 above, B Ltd is a member of ABC LLP and provides advertising services for ABC LLP. The work is carried out for B Ltd by A, who is also a member of ABC LLP. B Ltd provides no other services to ABC LLP.

B Ltd is treated as providing no services as the only service provided involves another member of the LLP. Therefore, the appropriate notional consideration for services is nil.

As such, B Ltd has an appropriate notional profit of £200, consisting purely of its notional return on capital.

Hopefully, this tutorial will help to alert the industry and deter those who may have otherwise been enticed by those profiteering by promoting high risk schemes. Please share this article via Facebook, email, word of mouth, other social media networks and in any other way you can think of.

Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).

There will never be an optimal ‘one-size-fits-all’ business structure for tax purposes

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