HMRC has issued a firm warning to landlords to steer clear of hybrid business model schemes.
These schemes are marketed as clever ways to structure your property business and reduce your tax bill, but they are often too good to be true.
The consequences of getting involved can be far more costly than any promised savings.
Now that they are on HMRC’s radar, you need to be careful that you are not putting your compliance at risk.
What is the scheme?
The hybrid business model is pitched as a way for landlords to reduce their tax bills by restructuring how rental profits are reported.
They often involve setting up a Limited Liability Partnership (LLP) that includes individual landlords and a corporate member, usually a limited company.
Properties are then transferred into the LLP and profits are distributed between the members in a way that supposedly minimises tax.
Instead of being taxed at higher or additional Income Tax rates at 40 per cent or 45 per cent, a portion of the profits will be allocated to the corporate member and they will pay Corporation Tax at a lower rate.
Many promoters also claim that this setup allows landlords to bypass restrictions on mortgage interest relief.
On paper, it sounds nothing but appealing.
However, it is not all that it is cracked up to be.
HMRC are clamping down on the scheme
HMRC have been clear that these schemes breach existing tax legislation, particularly rules made to prevent profit shifting between individuals and companies.
The mixed member partnership rules ensure that profits allocated to a corporate partner are reassigned back to the individual landlords if there is no genuine reasoning.
HMRC have also noted that even if income is routed through another structure, it can still be taxed as the landlord’s personal income.
The further risks of property transfers into LLPs or companies are that they can trigger Stamp Duty Land Tax (SDLT) and potential Capital Gains Tax (CGT) implications.
These costs are something that promoters often downplay or ignore.
HMRC is being blunt in their messaging and stating that these arrangements are high risk and likely to fail under scrutiny.
The risks of non-compliance
Landlords using or even debating the use of these schemes need to steer clear and be sure of the risks.
HMRC can challenge these arrangements and you could end up facing:
- A demand to repay the full amount of tax avoided
- Interest charges on unpaid tax
- Penalties
- A formal tax investigation
HMRC has also warned that scheme promoters can face fines up to £1 million and is proving just how serious they are about putting a stop to this issue.
You don’t want to have to end up paying more than you originally hoped to save and the added stress and disruption that non-compliance brings is just not worth it.
How can we help keep your compliance on track?
HMRC has advised anyone who is already involved in this scheme or has been approached to use it to speak to a qualified accountant.
Our professional team can cut through the marketing jargon and assess whether a tax-saving strategy is compliant with UK tax legislation.
We don’t want you to face any hefty penalties, so any advice we give on staying tax-efficient will be fully compliant.
If you need further advice or support with keeping your taxes compliant, get in touch.
