You may have heard about “tax-free” incorporation schemes using LLPs and liquidations, but HMRC is now cracking down. This article explains what landlords need to know about the latest tax avoidance warning and how to stay on the right side of the rules.
Why HMRC’s latest crackdown could affect your Incorporation plans
If you’re a landlord thinking about Incorporating your property portfolio, you may have come across schemes that promise to help you do it “tax-free” using a Limited Liability Partnership (LLP) and a Members’ Voluntary Liquidation (MVL). These arrangements are being marketed as clever ways to sidestep Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT), and even Inheritance Tax (IHT).
But HMRC has now made its position crystal clear: these schemes don’t work. And if you’ve used one, you could face a hefty tax bill.
What’s the issue?
In Spotlight 69, HMRC highlights a tax avoidance scheme where landlords:
- Transfer their rental properties into an LLP.
- Liquidate the LLP shortly after.
- Move the properties into a Limited Company that they control.
The idea is to create a “tax-free uplift” in the base cost of the properties, supposedly avoiding CGT not only at the point of Incorporation but also reducing CGT further down the line if the property is sold by the Limited Company subsequently. Furthermore, it is claimed that there is no SDLT liability due to special provisions for the transfer of assets to/from partnerships, and some promoters even claim it helps with Inheritance Tax (IHT) planning.
These schemes rely on interpretations of tax law that HMRC disputes, and in the last few years, the Courts have tended to back up HMRC's position. But if there was ever any room for doubt, HMRC has now shut this down through legislation directed specifically at the key element of these schemes.
From 30 October 2024, new legislation (Section 59AA of the Taxation of Chargeable Gains Act 1992) ensures that landlords are treated as having disposed of the property before it was transferred to the LLP, meaning CGT is due at that point.
What does this mean for landlords?
If you’ve used or are considering this type of scheme, here’s what you need to know:
- CGT is not avoided: CGT will be due at the point of creation of the LLP, even if the property hasn’t been sold.
- SDLT relief doesn’t apply: The partnership rules don’t work the way promoters suggest.
- IHT benefits are questionable: HMRC disputes the claim that Business Property Relief applies in these cases.
- You could face penalties: HMRC will claw back unpaid tax and charge interest and penalties on top of any fees you’ve paid to the scheme promoter.
What should you do?
- Used the scheme? HMRC advises you to withdraw and settle your tax affairs as soon as possible. Speak to a reputable tax advisor to ascertain your exposure and to discuss how to approach HMRC.
- Been approached? Avoid it. Report the scheme to HMRC if you’ve been targeted.
- Thinking about Incorporation? Speak to a qualified tax adviser and a mortgage broker (like us!) who understand the buy to let sector. There are legitimate ways to Incorporate, but they must be done properly.
Final thoughts
We understand the pressure landlords are under: rising interest rates, EPC targets, and now tighter tax rules. But cutting corners with aggressive tax schemes can backfire badly. If you plan to restructure your portfolio, ensure you’re doing it with the right advice and a clear understanding of the risks.
Watch our informative webinar on the right way to Incorporate your property portfolio.
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