HMRC is cracking the whip on tax avoidance schemes and warning landlords of the risks that come with them.
Hybrid business model schemes have been promoted as clever ways to restructure a property business and cut tax bills.
It sounds nothing but appealing, right?
However, the consequences of using these schemes are often downplayed and they can be far more costly than any promised savings.
HMRC is keeping a close eye on tax compliance and you need to be sure you are not putting your business at risk.
The hybrid business model claims to help reduce landlords’ tax bills by restructuring how rental profits are reported.
They often involve setting up a Limited Liability Partnership (LLP) that includes individual landlords and a corporate member, usually a limited company.
Properties are then transferred into the LLP and profits are split between the members in a way that supposedly minimises tax.
Instead of being taxed at higher or additional Income Tax rates at 40 per cent or 45 per cent, a portion of the profits will be allocated to the corporate member and they will pay Corporation Tax at a lower rate.
Many promoters also claim that this setup allows landlords to bypass restrictions on mortgage interest relief.
This might appear as a beneficial tax-saving plan. However, once you take off the rose-tinted glasses, you should be able to see the risks.
HMRC has made it known that these schemes breach existing tax rules, particularly those aimed at preventing profit shifting between individuals and companies.
The mixed member partnership rules ensure that profits allocated to a corporate partner are reassigned back to the individual landlords if there is no genuine reasoning.
HMRC have also noted that even where income is routed through different structures, it can still be treated as personal income for tax purposes.
There are also the risks that property transfers into LLPs or companies can trigger Stamp Duty Land Tax (SDLT) and potential Capital Gains Tax (CGT) implications.
These costs are something that promoters often gloss over or ignore.
HMRC is being clear in their messaging. These arrangements are high risk and likely to fail under scrutiny.
If you are caught being non-compliant, you could face:
It’s not just landlords who are feeling the heat from HMRC. Promoters could also face fines up to £1 million and this proves just how serious they are about putting a stop to this issue.
HMRC has advised landlords to seek professional advice if they have been approached about these arrangements or are already involved in the scheme.
Our qualified accountants can review your set-up and make sure you are staying compliant with UK tax legislation.
We are ready to cut through the false promises and offer you compliant advice on staying tax-efficient.
If you need further advice or support with keeping your taxes compliant, get in touch.
