A tax avoidance scheme being marketed to private landlords ‘will not work’ and could lead those who take them paying more tax in the long run, HMRC has warned.

It says such schemes, which are being marketed as ‘hybrid business models’ by some tax planning consultants, claim landlords can bypass mortgage interest relief restrictions allowing increased deductions for mortgage interest.

Other claims being made include that the scheme reduces the tax payable on profits generated by the property business; reduce Capital Gains Tax payable when properties are sold and reduce Inheritance Tax payable when a landlord dies.

“HMRC’s view is that this scheme does not work,” the new guidance says.

“HMRC’s view is that this scheme does not work,” the new guidance says.

“People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.”

These schemes seek to avoid tax by allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a parallel limited company or ‘corporate member’. The LLP then allocates profits on a discretionary basis to members.

Caught out

“If you think you’re already involved in this arrangement and want to get out, HMRC can help,” the guidance says.

“HMRC offers a range of support to get you back on track or avoid being caught out in the first place.

“If you’re using this or similar schemes or arrangements, HMRC strongly advises you to withdraw from it and settle your tax affairs. You can do this by emailing HMRC and we will tell you what further information we require.

Promoters of these hybrid business model schemes are also being targeted and face penalties of up to £1 million.