Less Tax for Landlords tax scheme subject to HMRC challenge

Less Tax for Landlords (and the Bailey Group) marketed a tax-planning option to individual buy-to-let property landlords to structure their property letting business (the LT4L Scheme).

The LT4L Scheme is a tax-planning option that involves landlords declaring a trust over their buy-to-let rental properties in favour of a limited liability partnership (LLP). The key steps associated with the LT4L Scheme include:

• The landlord sets up the LLP and transfers the economic interest in their rental properties to a trust (with the landlord and their spouse as members).
• The landlord would also set up a new incorporated company (NewCo) as a member of the LLP and owned by the landlord and/or their spouse.
• A transfer of economic interest is achieved by declaring a trust over the properties in favour of the LLP, with the landlord remaining titleholder of the properties and Newco taking the economic (or beneficial) interest in the LLP.
• The LLP diverts its profit to NewCo (a beneficiary of the trust).

The LT4L Scheme attempts to:

• Bypass mortgage interest relief restrictions to allow increased deductions for mortgage interest by NewCo.
• Reduce the tax payable on profits generated by the property letting business in the landlord's hands.
• Reduce or avoid CGT and Inheritance Tax (IHT) when the properties are sold to NewCo.
• Obtain an increase in base cost in the rental property for CGT purposes meaning any pre-incorporation capital gains can be ignored.

Material risks associated with the LT4L Scheme

There are a number of issues with the LT4L Scheme. In our view, the scheme is unlikely to achieve the tax savings Less Tax for Landlords claim it does. There are material risks that landlords will incur additional tax.

Based on the information we have seen, material risks associated with the LT4L Scheme include:

• An upfront incurrence of CGT. As the landlord retains an interest in the let properties despite creating the LLP, any fraction of the properties disposed of to NewCo would constitute a disposal for CGT purposes.  
• A subsequent CGT charge in the landlord's hands and NewCo's hands. We would expect both the landlord and NewCo (on its fractional share) to pay CGT on any subsequent disposal of the properties.
• A charge to SDLT when the scheme is set up.
• HMRC challenging the deductibility of loan interest in the LLP members' hands (specifically NewCo's hands).
• Landlords breaching the terms of any existing mortgage for a failure to disclose the terms of the trust in favour of the LLP.
• Triggering of the mixed partnership rules in terms of which LLPs are prohibited from allocating income to different partners in certain ways.
• NewCo's income being caught by the transfer of income streams rules.   
• IHT consequences linked to a property rental business falling within the exclusions from business property relief under the Inheritance Tax Act 1984. 
• A notification obligation for Less Tax for Landlords to HMRC under the DOTAS regime.
• Penalties and interest in relation to the above.

What HMRC says

HMRC agrees that there are a number of material risks associated with the LT4L Scheme and has set out its position in detail in its Guidance on Property Business arrangements involving hybrid partnership (Spotlight 63) – see the link below.

HMRC is now investigating and actively challenging aspects of the LT4L Scheme e.g. Less Tax for Landlords' website currently states:

"This is an important message to all clients and contacts of Less Tax for Landlords.
We are currently in contact with HMRC regarding the publication of guidance on their website for Hybrid Partnership arrangements, a type of structure that LT4L use with some of our clients.

The implication is that promoters of such structures as defined in the guidance are required to register with HMRC under DOTAS, and we are working to clarify our position to ensure that we remain compliant at all times. 

As a company, we are committed to providing the best possible service and we are doing everything we can to obtain the full picture, at which point we will advise further.

Please note that whilst we undertake this exercise we will not be accepting new appointments to discuss property business restructures, although existing clients can contact us through the usual channels."

How can we help?

HMRC is now investigating and challenging aspects of the LT4L Scheme.

We understand that clients of Less Tax for Landlords may not have been fully alerted to the potential risks associated with the LT4L Scheme.

We are actively looking to recruit new members to join a potential group action against LT4L. We are also working with those impacted to help resolve any outstanding issues with HMRC.

By structuring this claim as a group action, we plan to make it affordable and proportionate for you to seek compensation and resolve any outstanding issues with HMRC.

Links:

• Fieldfisher Contentious Tax team - recent lanmark success
• Property 118 Scheme
• Less Tax for Landlords website
• HMRC's Guidance on Property Business arrangements involving hybrid partnership