Today, we explore the ongoing situations surrounding two firms specialising in tax structuring for landlords: Property118 and Less Tax 4 Landlords
We discuss the potential implications for their clients, and the community of landlords making use of any tax structuring firms.
We offer our opinion to those affected by either of these companies or find themselves in similar situations. Read on to find out more.
(Read Time: Approx. 7 minutes)
- HMRC’s spotlight into property incorporation structures, such as those promoted by Property118 and Less Tax for Landlords.
- Advice for affected landlords on navigating potential tax liabilities.
Increased Attention: Examining Property118’s Practices
Recently, HMRC’s focus has turned to Property118, a firm specialising in tax structuring for landlords involving the creation of trusts and companies.
Reports suggest that the company may have engaged with a large number of landlords, with claims of significant tax-related implications.
The complex and debated nature of these strategies is highlighted by their potential use of convoluted financial structures that, in many instances, fail to provide the tax savings they promise.
There are concerns that clients might face unexpected tax liabilities and legal challenges.
The Complicated Property118 Tax Solution
Property118 proposes a tax structure they call the “Substantial Incorporation Structure” that promises major tax benefits for landlords.
In this scheme, a landlord, referred to as X, establishes a new company (the Company) and sells their properties to it in exchange for shares.
However, the sale’s completion is deferred, allowing X to remain the registered property owner and establish a trust with the Company as the beneficiary.
This setup is designed to be concealed from the mortgage lender, supposedly avoiding a breach of mortgage terms, and enabling tax relief claims.
However, the reality is starkly different.
Such a transfer of property ownership into a trust without lender consent is often a breach of mortgage terms, as confirmed by UK Finance, a mortgage lender association.
Tax-wise, the situation deteriorates as well. The indemnity payments received by X for covering mortgage payments become taxable income, while the interest paid to the bank is not tax-deductible for X, leading to a significant increase in the overall tax bill.
Additionally, there’s a risk of substantial initial Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT), plus an annual Tax on Enveloped Dwellings (ATED) return requirement, often overlooked and resulting in penalties.
Overall, this proposed structure is fraught with legal and financial pitfalls, making it an approach that can carry potential risks and complexities for landlords.
Originally, inquiries made towards the tax structures were made by Dan Neidle of Tax Policy Associates Limited.
Since originally making an inquiry as to the reliability of the tax structures laid out, Dan Neidle has made several inquiries to Property118.
Property118 responded to Dan Neidle’s original claims, which you can read here.
To quote, Property118 make it clear that they “do not advise on the implementation of anything that could be described as a “scheme”.”
HMRC’s Response to Incorporation Relief Claims
In November 2023, HMRC announced enquiries into incorporation relief claims dating back to 2017/18.
HMRC’s enquiries may shed light on significant oversights in Property118’s advice, potentially leading to unanticipated capital gains tax for numerous landlords, thereby invalidating the firm’s strategies.
Less Tax 4 Landlords: A Similar Situation
Mirroring Property118’s scenario, Less Tax 4 Landlords could face HMRC’s scrutiny for its tax avoidance structures involving trusts and limited liability partnerships.
The firm’s advice, often conflicting with standard mortgage terms, potentially exposes clients to unanticipated tax burdens.
HMRC’s spotlight on these schemes highlights the risks of such tax planning strategies.
The Risks of Less Tax 4 Landlords’ Strategy
Less Tax 4 Landlords (LT4L) offers a similarly complex tax strategy involving a limited liability partnership (LLP) and a company, aimed at reducing tax liabilities for property owners.
Landlords join the LLP, form a company, and allocate profits and property rights in a specific way to achieve tax benefits, including lower rental income tax and exemption from inheritance tax.
However, this approach has several legal and financial pitfalls.
Key issues include:
- Mortgage Default Risk: Transferring property to a trust without informing the mortgage lender can lead to a default on the mortgage.
- Inheritance Tax Misconception: Rental businesses typically don’t qualify for the promised inheritance tax relief.
- Unchanged Mortgage Obligations: Despite claims, mortgage obligations still lie with the landlords, not the LLP, nullifying expected tax relief.
- Profit Allocation Flaws: The strategy’s profit allocation to a corporate partner doesn’t confer the intended tax benefits due to existing tax laws.
- Unaddressed Tax Liabilities: The structure can trigger upfront capital gains tax and ongoing stamp duty land tax liabilities.
- Mandatory Disclosure: The scheme requires disclosure under tax avoidance rules, increasing scrutiny from tax authorities.
Given these concerns, the LT4L strategy is fraught with risks, potentially leading to significant legal and tax issues for its clients.
Less Tax 4 Landlords has also commented on these claims, which were also originally brought forwards by Dan Niedle.
You can read through Dan Niedle’s original report on Less Tax 4 Landlords here.
Since this report has been published, LT4L has updated their website’s frontpage with an important message to clients, disclosing that they are currently in contact with HMRC regarding Hybrid Partnership arrangements.
Guidance for Affected Landlords
Affected landlords should act promptly.
The first step is to seek independent, qualified tax advice.
Given the complexity of the issues and the impending deadlines, it’s crucial to consult with professionals familiar with such tax investigations and disputes.
HMRC’s “One to Many” Letters and their effect
In November 2023, HM Revenue & Customs (HMRC) is launching a One to Many (OTM) letter campaign targeting a specific group of taxpayers.
This campaign focuses on those who incorporated their property business in the 2017/18 tax year but reported no Capital Gains Tax (CGT) liability on their Self Assessment returns, assuming full incorporation relief under section 162 of the Taxation of Chargeable Gains Act 1992.
The HMRC letter instructs taxpayers to reassess their incorporation relief calculations, highlighting certain technical aspects and referencing HMRC guidelines.
Taxpayers are advised to consult professionals if uncertain about their situation.
The letter emphasises the importance of accurate fact establishment and consideration of assessment time limits.
Taxpayers who identify errors in their tax returns are asked to disclose these via a specified email address.
Conversely, if taxpayers confirm the accuracy of their original information, they should inform HMRC through another provided email.
Should HMRC not receive a response within 30 days, they may consider further actions.
This could include making a discovery assessment under section 29 of the Taxes Management Act (TMA) 1970, subject to assessment time limits, or amending the claim under s9ZB TMA 1970, based on legislative criteria and time constraints.
Presently, P118 and LT4L are theorised to be receiving these letters, and so, have around a month to respond to them.
Seeking Professional Help: Choosing the Right Adviser
For taxpayers involved with Property118 or Less Tax for Landlords (LT4L) schemes facing potential tax issues, finding the right adviser is crucial.
Here are some guidelines:
- HMRC Contact: While HMRC suggests direct contact, it’s advisable to consult a tax adviser first. This could be beneficial, especially in potentially reducing penalties if you approach HMRC proactively after seeking advice.
- Expertise in Tax and Investigations: Your adviser should be well-versed in technical tax matters and experienced in handling HMRC investigations. While litigation experience isn’t essential, familiarity with representing clients in these processes is.
- Familiarity with Property118/LT4L: An adviser already knowledgeable about these specific schemes, preferably with experience in assisting other clients, can offer more efficient and cost-effective guidance.
- Regulated Professionals: Ensure your adviser is regulated, such as being a member of the Chartered Institute of Taxation (CIOT), the Institute of Chartered Accountants in England and Wales (ICAEW), or a certified solicitor or barrister.
- Beware of Sales Pitches: Avoid advisers who seem more like salespeople. Qualified advisers should be the ones directly handling your queries.
- Caution Against New Schemes: Be wary of advisers proposing complex new structures, especially those claiming to counteract HMRC actions on previous schemes.
- Patience with the Process: Tax investigations are typically slow, often taking months for HMRC to respond. Be prepared for a potentially lengthy and uncertain process.
In summary, choosing the right adviser is key to navigating the complexities of tax issues, especially one experienced in the specific challenges of these schemes and in dealing with HMRC investigations.
Time will tell what becomes of the clients of these firms, and the road ahead will be long and hard.
We all await HMRC’s reports and discoveries on these firms in the coming weeks.
The unravelling of Property118 and Less Tax for Landlords’ tax avoidance schemes serves as a stark reminder of the risks associated with such strategies.
It is advisable for landlords involved in these situations to consider their options carefully.
Landlords may benefit from consulting with qualified tax professionals to understand the implications of their situation and safeguarding their financial future.
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