HMRC Warning Against Tax-Evasive Hybrid Property Partnerships
Landlords should exercise caution regarding hybrid property partnership arrangements, following a recent spotlight warning from HMRC. These schemes, which claim significant tax savings, are under scrutiny, with HMRC clearly stating that they do not align with tax legislation, potentially leaving landlords financially vulnerable.
The Structure of Hybrid Property Arrangements
These schemes involve landlords or joint property owners transferring their assets into a Limited Liability Partnership (LLP) with a corporate member. An LLP combines partnership flexibility with the benefit of limited liability for its members. Under this scheme:
· Individual landlords or their family members establish a limited company.
· They then set up an LLP alongside this company, which acts as the corporate member.
· Properties are transferred into the LLP.
· Profits from the LLP are allocated discretionarily, aiming to keep individual landlords in the basic tax rate bracket, while the remaining profits are allocated to the corporate member.
· The corporate member claims deductions for mortgage interest and finance costs.
Advertised Benefits of the Scheme
Promoters of these arrangements claim various tax advantages, including:
· Circumventing rules that restrict mortgage interest relief for unincorporated landlords.
· Reducing tax on property income business profits.
· Decreasing capital gains tax on property sales.
· Lowering inheritance tax liabilities upon the landlord’s death.
Risks and Legal Implications
HMRC emphasises that these schemes fall within existing tax legislation, negating the proposed benefits. Landlords participating in such arrangements may face not only the original tax dues but also additional penalties and interest charges, along with fees to the scheme promoter.
HMRC advises landlords involved in these schemes to disengage and settle their tax affairs. They encourage affected individuals to make a disclosure to HMRC and seek independent professional advice.
Responsibilities and Penalties for Scheme Promoters
Promoters of these schemes are obliged to comply with the Disclosure of Tax Avoidance Schemes (DOTAS) legislation, mandating them to inform HMRC of any marketed arrangements. Failure to disclose a scheme falling under DOTAS can result in significant penalties, including daily fines and potential penalties up to £1 million.
Landlords must be vigilant and critically assess the legitimacy and legal standing of any tax-saving schemes, particularly those involving hybrid property partnerships. It’s crucial to understand the potential financial and legal repercussions of engaging in arrangements flagged by HMRC. Seeking independent professional advice is strongly recommended to ensure compliance with tax laws and to safeguard financial interests.
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