WARNING to landlords on property transfer to Limited company

By: ilyas Patel October 23, 2023

WARNING to Landlords on property transfer to Limited company using “Hybrid Business Models”

There’s been a rising tide of conversation within the property sector concerning a particular tax planning option related to landlord property transfer to company

You may have heard of it referred to as the ‘hybrid business model’.

On the surface, it appears to offer numerous benefits, from reduced taxes on property business profits to lessened Inheritance Tax obligations.

However, the HMRC is sounding the alarm and wants to set the record straight.

(Read Time: Approx. 4 minutes)

Topics Discussed:

The effects of Capital Gains Tax and Inheritance Tax on property business owners and understanding their implications and available reliefs.
Dangers and misconceptions surrounding the recent “Hybrid Business Models” and companies which operate them.

The Lure of the Hybrid Business Model

Before delving into HMRC’s perspective, let’s break down how the hybrid business model is purported to work:

Landlords or their families establish a limited company.

In conjunction, they also set up a Limited Liability Partnership (LLP), where the previously formed limited company becomes a corporate member.

These landlords then transfer their properties into the LLP.

The LLP profits are distributed selectively, ensuring that individual members remain basic rate taxpayers while the surplus profits go to the corporate member.

The corporate entity claims deductions for finance-related costs, like mortgage interest.

Proponents of this model argue it’s advantageous because:

Transferring properties to the LLP doesn’t entail upfront tax costs.

Enhanced base costs for Capital Gains Tax when selling properties.

Landlords stay within the basic tax rate, hence aren’t subjected to finance cost restrictions.

The corporate member pays only Corporation Tax on its net profit share, which could be lower than higher income tax rates.

It also supposedly reduces Capital Gains Tax due to the uplifted base cost during property transfer to the LLP and offers potential for no Inheritance Tax through Business Property Relief (BPR).

HMRC’s Stance

In stark contrast, the HMRC is unequivocal in their stance: these types of schemes don’t work.

They’ve highlighted that the arrangements are primarily ensnared by various legislations.

For instance, the mixed member partnership legislation reallocates excess corporate member profits to individual members.

There are also rules that tax the corporate member’s income on the original landlord and regulations maintaining the original base cost of properties when introduced to the LLP.

Furthermore, the chances of claiming BPR for a property rental business within this model are slim, thanks to exclusions under the Inheritance Tax Act.

Considering the Model? A Word of Caution

If you’re currently looking in to landlord property transfer to company and are contemplating diving into such arrangements, HMRC offers robust advice: steer clear and set your tax affairs in order.

Should you need assistance, HMRC provides support.

They also recommend seeking independent tax advice and reaching out to tax charities like TaxAid for guidance.

The Implications for Promoters

For those promoting this model, it’s crucial to be aware of the stringent obligations and penalties under the disclosure of tax avoidance schemes (DOTAS) legislation.

Failure to disclose such schemes could see penalties skyrocketing to £1 million.

Moreover, HMRC has the authority to disclose details about these tax avoidance schemes and the individuals or entities promoting them.

They’ve made it abundantly clear that they will take relentless action against promoters or enablers of tax avoidance, invoking penalties and leveraging their powers against those perpetuating such schemes.

How Can You Report a Suspicious Scheme?

If you come across such tax avoidance proposals or know someone peddling them, it’s straightforward to report this to the HMRC.

Their online form for reporting tax fraud or avoidance is user-friendly. The best part? You can maintain your anonymity, so there’s no need to provide personal details.

In Conclusion

The world of tax is intricate and constantly evolving.

While innovative strategies may present themselves as golden tickets, it’s essential to approach them with caution and armed with the right information.

Remember, if something appears too good to be true, it often is.

Always consult professionals, like us here at Tax Expert, and stay informed.

Consultation with a professional is paramount to navigate these waters. If you’re seeking clarity, please do not hesitate to get in touch with us at Ilyas Patel Accountants.

Sending an e-mail is simple too, just fill out this short form and we’ll get back to you!

Kind regards,

Ilyas Patel

Call us today: 01772 788200