Big changes to legislation have reduced the viability of renting properties in recent years. Some landlords have applied a tax avoidance scheme to reduce the tax payable on profits generated from rentals.
It is estimated that up to £50m of tax avoidance has taken place, involving hundreds of landlords. HMRC has confirmed that the scheme breaks tax laws and is warning landlords not to use the hybrid partner structure applied by the scheme.
The tax avoidance scheme sees landlords set up a limited company to hold the properties and then transfer their properties to a limited liability partnership (LLP). The LLP allocates profits to members, thereby avoiding tax.
This hybrid structure enables landlords to:
- bypass mortgage interest relief restrictions, allowing increased deductions for mortgage interest,
- reduce the tax payable on profits generated by the property business, and
- reduce capital gains tax (CGT) payable when properties are sold.
Under the LLP arrangement, the landlords remain basic rate taxpayers. This means finance cost restrictions do not impact them. The corporate member benefits as it is:
- able to claim a full deduction for its share of finance costs as finance cost restrictions do not apply to it, and
- 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.
As a result, the hybrid partnership structure helps landlords avoid income tax, capital gains tax, stamp duty land tax and inheritance tax (otherwise due when the landlord dies).
HMRC said: ‘If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs.”
Do you own buy-to-let properties?
Would you like to minimise your tax liability, safely?
Talk to the friendly tax experts at re:accounts Chartered Accountants in Stevenage. We love to keep our clients’ tax bills as low as possible. If your property is overseas, even better! Understanding international tax is our speciality. Let’s talk!
