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HMRC is cracking down on landlords who use a popular tax avoidance loophole to cut costs.
Buy-to-let investors risk being hit with penalties, interest charges and higher tax bills if they use a scheme that promises to bypass mortgage interest relief restrictions and reduce tax on profits, the taxman said.
The loophole involves restructuring businesses into limited liability partnerships (LLPs), rather than buying properties in the landlord’s own name.
HMRC said the arrangement breaks tax rules and that landlords who use it risk being fined.
It warned that anti-avoidance legislation will be enforced, meaning that even if a landlord transfers their rental income to another person or structure, that income will be treated as the landlord’s own income.
Accountancy firms have promoted LLPs to landlords since 2015, when George Osborne, the former Conservative chancellor, restricted tax relief for landlords to the basic rate of income tax. For landlords with a large portfolio, registering properties to an LLP was sold as a way of escaping the crackdown.
But HMRC issued guidance this week insisting the scheme “does not work” and advised landlords on how to exit the arrangement.
The Telegraph reported last year on an estimated 400 buy-to-let investors who faced potential six-figure bills as a result of using the scheme.
Many landlords use LLPs legitimately to structure their businesses, usually to protect property interests when multiple investors are involved. It is understood that HMRC will focus on arrangements that can be used to avoid tax, such as when discretionary profits are allocated to a corporate member.
Michelle Denny-West, of accountancy firm Moore Kingston Smith, said: “The tax landscape for landlords has become so onerous and expensive that landlords are looking for loopholes to reduce their exposure.
“Most people who enter into these schemes believe they work, [but] HMRC knows that the genuine economic ownership doesn’t change – they’re going to tax you as an individual.
“Quite often, high fees are paid to promoters, and in the end the taxpayer suffers.”