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HMRC targets ‘worst’ avoidance scheme

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HMRC has issued Spotlight 63, highlighting an avoidance scheme marketed to landlords which claims to bypass the restrictions on mortgage interest relief, reduce taxable profits from the property business and reduce CGT and IHT.

In very basic terms, the scheme proposes the following steps:

  • individual landlords set up a company and also an LLP, and transfer their properties to the LLP;
  • the individuals and the company are the members of the LLP (meaning it has a corporate member); and
  • the LLP then allocates profits to members on a discretionary basis, making sure individual members are not taken into the higher-rate tax band, with any remaining profits allocated to the corporate member - the corporate member also claims a deduction for finance costs.

The spotlight sets out HMRC’s view that the arrangements are caught by existing legislation.

Tax Policy Associates have also recently investigated property schemes which appear to be within HMRC’s sights via Spotlight 63. Alongside the potential failure of the schemes in terms of tax avoidance, TPA have also spotted that transferring ownership of buy-to-let properties without informing the lender risks breaching the terms of the mortgage agreement. TPA quote the view of UK Finance, the representative body for mortgage lenders: ‘If someone wishes to transfer ownership of a buy to let property they should contact their lender to discuss whether this is permitted under the terms of any mortgage on the property. Transferring ownership of a property into a trust without informing your lender and seeking their consent would most likely be a breach of a mortgage’s terms and conditions.’

TPA goes somewhat further, describing this scheme as ‘potentially even worse’ than the ‘worst avoidance scheme we’ve seen’.

Issue: 1636
Categories: News
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