HMRC has issued a warning to buy-to-let property owners regarding a tax avoidance scheme that may have cost up to £50 million in lost tax revenue.
Operated by "Less Tax 4 Landlords Ltd," this scheme involves landlords creating a limited company to hold their properties and subsequently transferring those properties to a limited liability partnership (LLP). The LLP then allocates profits to its members, effectively minimising their tax liabilities.
Benefits as Advertised and HMRC's Response
Landlords who participate in this scheme enjoy several tax advantages:
- Bypassing mortgage Interest Relief Restrictions, leading to increased deductions for mortgage interest.
- Reduced tax liabilities on property-generated profits.
- Lower Capital Gains Tax (CGT) when properties are sold.
HMRC urges those involved in this or similar schemes to withdraw and rectify their tax affairs. Individuals can contact HMRC via email at firstname.lastname@example.org for further guidance.
Scheme Promoters' Perspective and Their Penalties
Less Tax 4 Landlords Ltd has temporarily stopped accepting new clients for the scheme while awaiting HMRC's response.
Scheme promoters may face penalties if they fail to disclose the scheme to HMRC within five days of making it available or implementing it. Initial penalties can reach up to £600 per day, with the potential for larger fines.
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HMRC's Detailed Objections
HMRC has pointed out that the scheme violates several tax rules:
- Mixed Member Partnership Legislation (Income Tax Act 2005, Section 850C and s850D): This legislation reallocates excess profits of a corporate member of an LLP to individual members.
- Anti-avoidance Legislation for Disposal of Income Streams (Income Tax Act 2007, Chapter 5AA, s809AAZA): This applies to charge the corporate member's income on the transferor of the income stream.
- Taxation of Chargeable Gains Act 1992 S59A: This treats dealings in chargeable assets by an LLP as if done by individual members, keeping the base cost of properties unchanged.
- Inheritance Tax Act 1984, s105(3): HMRC argues that a property rental business may not qualify for Business Property Relief (BPR) under the exclusions for 'making or holding investments.'
HMRC's message is clear: this tax avoidance scheme is not a legitimate means of reducing tax obligations, and those involved should take immediate action to rectify their tax affairs.
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