HMRC is intensifying its efforts to close a tax avoidance loophole commonly used by landlords. The Labour government is targeting those who restructure their property businesses into limited liability partnerships (LLPs) instead of purchasing properties in their own names. Landlords using this method face penalties, interest charges, and increased tax bills, according to warnings from tax authorities.
HMRC's Stance on LLP Schemes
HMRC has stated that such arrangements violate tax regulations and that landlords participating in them risk being fined. Michelle Denny-West, a partner at accountancy firm Moore Kingston Smith, explained: “The tax landscape for landlords has become so onerous and expensive that landlords are looking for loopholes to reduce their exposure. Most people who enter into these schemes believe they work, but HMRC knows that the genuine economic ownership doesn’t change – they’re going to tax you as an individual. Quite often, high fees are paid to promoters, and in the end the taxpayer suffers.”
How the Scheme Claims to Work
Sometimes referred to as a hybrid business model, the arrangement allegedly bypasses restrictions on mortgage interest relief, allowing increased deductions for mortgage interest. It also purports to reduce the amount of tax payable on profits from property businesses. However, HMRC has warned all landlords not to use the scheme, insisting it does not work.
Consequences for Landlords
Ben Proctor, of Jon Preshaw Tax, commented: “Unfortunately there seems to be a ready market for people who can be persuaded to dodge tax. Promoters take high fees, then dodge responsibility by disappearing into the ether – it’s a fraudulent system that works. The people who bear the brunt are the landlords who have been deceived. There are the consequences of interest and penalties.”
Official Warning
An HMRC spokesman stated: “We’ve published this guidance to warn landlords about a tax arrangement being marketed as a way to reduce tax on property income. Our view is clear – these arrangements simply do not work and can leave users facing higher tax bills, interest and penalties.”
