Avoid These Tax Planning Models

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Around 20% of the landlords who consult me regarding tax ask about the “Hybrid strategy” or the “LLP to Incorporation Strategy”.

The reason I am so worried is that these structures are scheming to abuse the tax system, and it is only a matter of time before HMRC react to that or HM Treasury influences new legislation to ensure they fall under GAAR legislation (General Anti Abuse rules) or insist they should have been registered under DOTAS (Disclosure of Tax Avoidance Schemes). You may well have read about Film Partnerships and how some of those schemes abused the tax system. HMRC have powers to serve APN’s (Advance Payment Notices) on those who participate in such schemes, which call for the tax that would ordinarily have been paid to be paid immediately. It is then up to the individuals to prove the tax wasn’t due and to reclaim it. For many landlords, the consequences of that, given the amounts of money involved, could prove fatal to their businesses.

The Hybrid and the LLP to incorporation strategy “schemes” are being touted extensively by one particular company which visits all the landlord and property shows, and clearly has a very large marketing budget. The bottom line is that the promoters of these schemes are charging eye watering amounts of money to dress businesses up with a view to abusing the tax rules. In the examples I have written warning articles about, I have explained why the “schemes” are extremely high risk in my opinion. The problem is that the message isn’t being spread as far and wide as it needs to be.

Please click on the articles below, read them and then share them with friends who might be considering these strategies. When you read my articles you will hopefully be as worried for your friends as I am about these schemes.

Beware Tax Planning Models Using LLP’s

Hybrid Tax Structure – Landlords BEWARE!

So how should tax planning work?

Let’s say for example that incorporation is your goal. The first consideration must be whether the transfer of properties from personal ownership to the company will trigger a CGT bill. If HMRC consider that you are running a business  you will have the right to roll your capital gains into the shares in your new company. You don’t need a “scheme” to do that.

HMRC’s definition of a business is that: –

  1. Activities are a serious undertaking earnestly pursued
  2. Activity is a function pursued with reasonable or recognisable continuity
  3. Activity has a certain measure of substance in terms of turnover
  4. Activity is conducted in a regular manner and on sound and recognised business principles
  5. Activities are of a kind which, subject to differences in detail, are commonly made by those who seek to profit from them

The next consideration is Stamp duty. Again, you don’t need “schemes”. The law is very clear, if two or more people are running a business then a partnership exists under the Partnership Act 1890. You do not need to be an LLP or even to have registered a partnership with HMRC for the treatment of partnership rules to be applied to SDLT. Again, this is clear in HMRC’s internal manuals which we are always happy to share with our clients and their professional advisers.

The third consideration is the cost of refinancing. To avoid these costs, and if you prefer to retain the favourable mortgage terms you currently enjoy, we recommend the Beneficial Interest Company Transfer “BICT” strategy. This also has non-statutory clearance from HMRC, despite that fact that it’s purpose is to avoid refinancing costs as opposed to avoiding tax. The reason for this is that some client’s professional advisers, and even two National Newspapers, considered that some of the quirks within the structure were ambiguous in regards to tax legislation. We didn’t want to rely on a Barristers Opinion so we went direct to HMRC.

Tax isn’t the only reason for incorporating. There are many other considerations, some of which are positive and some of which are less so. One should never allow the tax tail to wag the dog!

Incorporation is only one of many tax planning strategies considered by Property118 when consulting on an individual’s circumstances and future aspirations.

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