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16/02/24

Landlords Beware! | Tax Avoidance Schemes Under Scrutiny

Landlords Beware! | Tax Avoidance Schemes Under Scrutiny
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The removal of various tax reliefs, which had been introduced by section 24 of the Finance Act 2015, has resulted in the appearance of a Tax avoidance Scheme (‘the Scheme’) being marketed as a tax planning option claimed to reduce Landlords’ tax liabilities.

HMRC is aware of the Scheme, sometimes referred to as a ‘Hybrid Business Model’ and takes the view that it does not work and that those relying on the arrangements may well, ultimately, find themselves paying more tax than they endeavoured to avoid plus interest and penalties.

The Scheme purports to enable its users to benefit financially from increased deductions for mortgage interest by avoiding defined restrictions and to reduce:

  • tax payable on profits generated by the property,
  • capital gains tax liability upon sale and
  • Inheritance tax.

HMRC considers that such arrangements amount to tax avoidance which it defines as:

bending the rules of the tax system to try to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage’.

It appears likely that those who have adopted the Scheme may become subject to an HMRC tax investigation.

Tim Thompson outlines the position generally.

Change in Legislation

Prior to 2021, Landlords enjoyed the benefits provided by Section 24 of the Finance Act 2015 (‘theAct’)which governed the relief afforded for finance costs related to a residential property business which included:

  • mortgage interest,
  • interest on loans to buy furnishings.
  • facility fees.

This tax relief, allowing Landlords to deduct these items from income when assessing tax liability, was totally removed in 2021 thereby resulting in substantially reduced net rental income to the detriment of property portfolios.

Whilst section 24 of the Act applies to:

  • individual landlords,
  • partnerships including LLPs and
  • trustees or beneficiaries of trusts,

it does not apply to a limited company.

Accordingly, the Scheme was designed with the intent of utilising the transfer of property from individuals into a company in order to bypass the new restrictions.

However, when property is transferred from an individual into the ownership of a limited company, Capital Gains Tax would be payable on any immediate gain and the Scheme also seeks to avoid such liability.

The Intent of the Tax Avoidance Scheme

The Scheme has been marketed to Landlords upon the basis that the transfer of ownership of the business properties into a limited company, would enable them to continue profiting from renting their mortgaged properties, whilst legally avoiding the statutory restrictions.

Two alternative formats favoured are:

  • The Individual- company incorporation

The Landlord is advised to incorporate a limited company into which property is transferred in exchange for shares in the company which then assumes responsibility for discharging the Landlord’s mortgage debt.

The company takes a Director's Loan from the Landlord which it repays from the business property profits.

  • The Partnership- company incorporation

The Partnership Scheme purports to achieve Stamp Duty Land Tax avoidance for a married couple, jointly owning a property rental business.

The Scheme involves the parties retrospectively claiming that they have always conducted a business partnership, and that the Stamp Duty Partnership Relief is available, even where there is no evidence of a Partnership Agreement, tax returns or extraneous evidence of the alleged Partnership’s existence.

It is claimed that, ultimately, payment of tax on dividends, Capital Gains Tax and, if a Partnership existed, Stamp Duty Land Tax could all be legally avoided.

How Can We Assist?

Deliberately avoiding payment of taxes properly due to HMRC is a serious criminal offence, conviction for which may result in imprisonment.

HMRC has already stated that the Hybrid Business Model does not work and that its adoption amounts to tax avoidance. Further guidance is awaited from HMRC.

However, the introduction of Schemes alleged to be capable of avoiding payment of properly due tax is by no means a new phenomenon and caution must always be exercised before entering into any such arrangement. As with many situations, ‘if it seems too good to be true, it probably is’.

More likely than not, HMRC will be conducting detailed investigations into those who have adopted Hybrid Business Model and, where appropriate pursuing whatever form of, at the least, recovery proceedings it chooses.

Should you become subject to such a tax enquiry involving the Scheme, or indeed, any other form of HMRC Investigation, it is essential that immediate legal advice is taken

HMRC may wish to, at an early stage, conduct an Interview, the outcome of which may have serious consequences. Accordingly, no form of questioning or Interview of any nature should be entered into without the support of experienced legal guidance.

The Team at KANGS enjoys an enviable nationwide reputation for assisting clients facing HMRC Tax investigations and would be pleased to assist you.

We welcome enquiries via:

Telephone: 0333 370 4333

Email: info@kangssolicitors.co.uk

Hamraj Kang

Hamraj Kang
Senior Partner

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Tim Thompson

Tim Thompson
Partner

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John Veale

John Veale
Partner

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