In recent years, landlords have been faced with various increasing tax pressures, such as loan interest relief restricted to a maximum of 20%, higher income tax rates from April 2027 (with rental income being taxed at two percentage points higher across all income tax bands), plus increased rates of Stamp Duty Land Tax (SDLT) on purchase and Capital Gains Tax (CGT) on disposal. Property investors are perhaps understandably looking for different ways to limit tax exposure.
It is therefore not surprising that there is an increase in the promotion of tax arrangements specifically targeted at landlords, claiming to save tax on multiple fronts.
Since 2023, HMRC have countered this by releasing several Spotlights (63, 63A and 69) announcing in no uncertain terms their robust stance on these marketed tax planning arrangements. The simple message is they do not work as claimed.
All three Spotlights focus on hybrid arrangements that seek to reduce income tax, CGT, SDLT and Inheritance Tax (IHT) for landlords, often involving Limited Liability Partnerships (LLPs) and Limited companies.
Inclusion of an arrangement in a Spotlight release is a strong indicator that HMRC will be actively looking to pursue users of such arrangements. Any users can expect HMRC compliance interventions and greater scrutiny of historic advice and implementation.
HMRC’s consistent position is ‘the schemes do not work’ (GOV.UK), meaning users risk costs of paying tax, interest, penalties (which can be up to 100% of tax) plus irrecoverable professional fees paid out to promoters of such arrangements.
HMRC also receives increasing amounts of third-party real-time information that is interrogated to identify users of such arrangements and inform targeted HMRC enquiries. It is, therefore, more important than ever for property investors to ensure they take appropriate, bespoke tax planning advice, rather than enter into mass-marketed schemes; otherwise they are likely to face HMRC scrutiny.
Landlords should ensure that any planning undertaken is structured specifically to their property business and supported by genuine commercial rationale and robust interpretation of tax legislation; otherwise, they could fall foul of the numerous anti-avoidance rules enacted to close any perceived loopholes.
Key points for landlords
Spotlight 63 – ‘Too good to be true’ tax outcomes
This Spotlight focuses on ‘hybrid’ LLP structures with a corporate member. Properties are transferred into the LLP by the landlord, and future profits are then allocated disproportionately to the corporate member, with the company claiming full finance cost deductions without any restrictions (as individual landlords are restricted to mortgage interest relief at basic rate).
These schemes claim that the structure can simultaneously reduce income tax, CGT, SDLT and IHT, with promises of tax-free incorporation of property portfolios, plus CGT-free transfers and/or base cost uplifts.
HMRC’s view is that such arrangements are ineffective and are caught by multiple pieces of anti-avoidance legislation, including mixed membership partnership rules, which determine how excess profits of a corporate member of an LLP are reallocated to individual members.
Read GOV.UK's guidance on Spotlight 63
Spotlight 63 A - Use of indemnities or ‘notional capital contributions’
This spotlight covers updated variants of the hybrid LLP arrangements covered by Spotlight 63 and specifically covers the use of indemnities for mortgage liabilities.
In these arrangements, a corporate LLP member is said to:
- take on mortgage liabilities of the landlord via indemnities
- which are then treated as making a capital contribution to justify profit allocation.
HMRC’s position is that indemnities do not create genuine economic capital contributions to justify profit allocations, and as such these arrangements do not work.
Read GOV.UK's guidance on Spotlight 63 A
Spotlight 69 - Circular or staged transactions involving LLP
Finally, Spotlight 69 considers schemes that involve multi-step arrangements involving an LLP and a connected Limited company.
The typical scheme involves:
- transfer of the property business into an LLP at market value
- after a short time, the LLP is placed into Members’ Voluntary Liquidation (MVL)
- following which, assets are transferred into a connected Limited company.
These steps claim to avoid CGT on transfers, whilst securing uplift to CGT base cost values, plus avoidance of SDLT charges and potential IHT savings for the landlord in the form of business property relief (BPR).
This kind of arrangement was significantly disrupted by legislative changes introduced by HMRC (Section 59AA into the Taxation of Chargeable Gains Act 1992) effective from 30 October 2024, which deems a disposal to take place when a member of an LLP contributes an asset to an LLP.
This legislation update deems that a disposal takes place immediately before the asset is contributed into the LLP, crystalising a capital gain for the member (i.e. former landlord) at this point on market value less price paid.
These targeted legislative changes create retrospective disruption to schemes of this kind and highlight the importance of monitoring ongoing legislative developments closely, to ensure any planning undertaken is not negated by legislative updates.
How Crowe UK can help
When HMRC challenges a tax planning arrangement, the focus needs to be on risk management and protecting your position.
Whether you are a landlord who has used a scheme, or a professional adviser who is looking to assist a client, Crowe can provide tailor-made support such as:
- an independent review of any planning implemented with an honest appraisal of whether or not it achieves the purported outcome,
- representation during HMRC investigations or assistance with making voluntary disclosures to resolve historic tax problems, as well as making representations about mitigating circumstances for a reduced tax assessment window and penalty purposes, if appropriate
- strategic and technical risk reviews, to give you a second opinion
- bespoke planning advice on tax-efficient property ownership for your property business.
For more information on how we can support you, please get in touch with your usual Crowe UK contact.
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