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HMRC has issued a firm warning to landlords to steerclear of hybrid business model schemes.
These schemes are marketed as clever ways to structureyour property business and reduce your tax bill, but they are often too good tobe true.
The consequences of getting involved can be far morecostly than any promised savings.
Now that they are on HMRC’s radar, you need to becareful that you are not putting your compliance at risk.
What is the scheme?
The hybrid business model is pitched as a way forlandlords to reduce their tax bills by restructuring how rental profits arereported.
They often involve setting up a Limited LiabilityPartnership (LLP) that includes individual landlords and a corporate member,usually a limited company.
Properties are then transferred into the LLP andprofits are distributed between the members in a way that supposedly minimisestax.
Instead of being taxed at higher or additional IncomeTax rates at 40 per cent or 45 per cent, a portion of the profits will beallocated to the corporate member and they will pay Corporation Tax at a lowerrate.
Many promoters also claim that this setup allowslandlords 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 existingtax legislation, particularly rules made to prevent profit shifting betweenindividuals and companies.
The mixed member partnership rules ensure that profitsallocated to a corporate partner are reassigned back to the individuallandlords if there is no genuine reasoning.
HMRC have also noted that even if income is routedthrough another structure, it can still be taxed as the landlord’s personalincome.
The further risks of property transfers into LLPs orcompanies are that they can trigger Stamp Duty Land Tax (SDLT) and potentialCapital Gains Tax (CGT) implications.
These costs are something that promoters often downplayor ignore.
HMRC is being blunt in their messaging and stating thatthese arrangements are high risk and likely to fail under scrutiny.
The risks of non-compliance
Landlords using oreven debating the use of these schemes need to steer clear and be sure of therisks.
HMRC can challengethese arrangements and you could end up facing:
· Ademand to repay the full amount of tax avoided
· Interestcharges on unpaid tax
· Penalties
· Aformal tax investigation
HMRC has alsowarned that scheme promoters can face fines up to £1 million and is proving just how serious they areabout putting a stop to this issue.
You don’t want tohave to end up paying more than you originally hoped to save and the addedstress and disruption that non-compliance brings is just not worth it.
How can wehelp keep your compliance on track?
HMRC has advisedanyone who is already involved in this scheme or has been approached to use itto speak to a qualified accountant.
Our professionalteam can cut through the marketing jargon and assess whether a tax-saving strategyis compliant with UK tax legislation.
We don’t want youto face any hefty penalties, so any advice we give on staying tax-efficientwill be fully compliant.
If you needfurther advice or support with keeping your taxes compliant, get in touch.
