Everyone would like to pay as little tax as possible. However, any methods used to minimise your tax liability must be legal.
The property sector has seen many changes to tax legislation recently. Landlords need to ensure their property finances comply with current requirements. This especially applies to property owners using limited liability partnerships. Avoidance schemes offer the additional illegal potential to avoid capital gains tax (CGT), inheritance tax (IHT) and stamp duty land tax (SDLT).
The tax avoidance scheme promoted to landlords involves transferring a property owner’s rental business to a limited liability partnership (LLP) at market value. The value includes accrued capital gains. In some cases, this may be a substantial amount. Instantly after transfer, the LLP is liquidated via a members’ voluntary liquidation (MVL). The properties are then sold to a limited company owned by the landlord or connected parties (if continuing with the business).
For the purposes of the members’ voluntary liquidation, the LLP is seen to acquire its assets at the time of the contribution for its market value. The increase in asset value when properties are initially transferred therefore avoids GCT taxation. HMRC has confirmed this practice and its tax savings are not legal, stating: ‘This scheme does not work. People who use this scheme may have to pay more than just the tax they tried to avoid as well as paying interest, penalties and fees for using such schemes.’
A warning to landlords
HMRC has cautioned UK landlords, confirming it will clamp down robustly against property owners who transfer properties to limited liability partnerships to evade tax.
The scheme is promoted as saving tax in the following ways:
it enables the landlord to transfer properties into a company tax-free without needing to apply CGT incorporation relief;- there is no CGT due on the contribution of the property to the LLP, and on disposal by the LLP there is a tax-free uplift in the CGT base cost to its value at the time of contribution;
- no SDLT liability arises on the transfers of the property into the LLP or for any subsequent transfer into a limited company, due to the special provisions for transfers of chargeable interests to and from partnerships under Schedule 15 of Finance Act 2003; and
- there are potential IHT benefits through business property relief (BPR).
HMRC said: ‘Anyone using this or similar schemes is strongly advised to withdraw from it and settle their tax affairs by emailing HMRC and we will tell you what further information we require.’
Are you a property landlord?
Whether you own a single rental property or a portfolio, it is worth seeking professional advice to ensure you comply with tax requirements. The tax experts at re:accounts Chartered Accountants in Stevenage are here to help. Contact us for an initial discussion without obligation.
