HMRC has confirmed a new expectation of landlords, issuing a stark warning over risky tax schemes that it says simply do not work. The tax authority warned that anyone tempted by arrangements promising easy savings on rental income should treat them as a major red flag.
Hybrid Property Business Models Under Scrutiny
The warning centres on so-called hybrid property business models, which are being marketed to landlords as a way to sidestep restrictions on mortgage interest relief and cut overall tax liabilities. HMRC stated: We expect landlords and agents to pay the correct tax. Schemes promising simple tax savings should raise a red flag.
Under these arrangements, landlords are encouraged to transfer their properties into a limited liability partnership (LLP) that includes a company as a corporate member. Promoters claim this structure allows profits to be distributed in a way that reduces tax, including shifting income into a company that pays Corporation Tax rather than higher-rate Income Tax.
HMRC's Stance on Anti-Avoidance Rules
HMRC insists the strategy falls foul of multiple anti-avoidance rules. It said legislation means profits artificially diverted to a corporate partner are likely to be reallocated back to the individual landlord, wiping out any supposed benefit. At the same time, other rules ensure rental income is still treated as belonging to the landlord, even if it has been transferred into another structure.
HMRC added that in many cases, landlords may also face significant professional fees for setting up and running the arrangements, compounding the financial hit.
Urgent Advice for Landlords Already Involved
Those already caught up in such schemes are being urged to come forward early. The department said: Acting early can help reduce risk and bring your tax affairs up to date. Landlords can contact HMRC directly to unwind arrangements and potentially limit penalties, while also being advised to seek independent tax advice.
The crackdown also extends to those behind the schemes, with HMRC signaling further action against promoters.
