HM Revenue & Customs (HMRC) issued guidance recently regarding a scheme used by individual landlords to avoid paying tax on their property income, and to reduce Capital Gains Tax and Inheritance Tax.

It stated: ‘HMRC is aware of a scheme being marketed as a tax planning option available to individual property landlords to structure their property business. Sometimes referred to as a hybrid business model, the arrangement claims to:
◆ bypass mortgage interest relief restrictions allowing increased deductions for mortgage interest
◆ reduce the tax payable on profits generated by the property business
◆ reduce Capital Gains Tax payable when properties are sold
◆ reduce Inheritance Tax payable on death

‘HMRC’s view is that this scheme does not work. People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.’

How the arrangements claim to work
The arrangements seek to avoid tax by allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a corporate member. The LLP then allocates profits on a discretionary basis to members.

The arrangements are claimed to work as follows:
1. The individual landlords or their family members, or both, set up a limited company.