HMRC Warns Landlords on CGT Avoidance Scheme

HMRC is warning buy-to-let landlords not to join a tax avoidance scheme that promises to save capital gains tax.

HM Revenue & Customs says the scheme does not work, and landlords who participate must pay penalties and interest on top of the tax they owe.

The scheme allows landlords to transfer their property businesses to a company via a limited liability partnership (LLP), saving significant amounts of CGT.

An HMRC spokesperson said: "HMRC's view is that this scheme does not work. People who use this scheme may have to pay more than just the tax they tried to avoid, and pay interest, penalties and fees for using such schemes.

"If you're using this or similar schemes, HMRC strongly advises you to withdraw and settle your tax affairs."

How the scheme works

An online technical note from HMRC outlines how the scheme works - and how tax rules are broken.

The scheme starts with an individual landlord running an unincorporated property business.

• The landlord forms an LLP.
• Any rental properties are transferred to the LLP at market value. Often, the properties have accrued large amounts of potential CGT liability.
• After a few months, the LLP is put into Members' Voluntary Liquidation (MVL).
• The properties are sold - often back to the landlord with zero CGT liability, which was wiped off with the MVL.

HMRC argues that the scheme is avoidance because the process is a series of artificial transactions intended only to save tax. Advisers selling the scheme will suggest landlords can save CGT, stamp duty and inheritance tax by following the steps.

What to do if you're involved

"If you think you're already involved in these schemes and want to get out, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place," says the online guidance.

HMRC explains that scheme promoters claim that transferring buy-to-let properties to an LLP opens the way to save CGT by avoiding corporation relief. The schemes also claim that stamp duty and inheritance tax (IHT) can be minimised.

Promoters should register and disclose the scheme with a DOTAS notice to warn landlords that HMRC may contest how the scheme works.

HMRC advises landlords using the scheme to take independent professional advice or contact HMRC on spotlight@hmrc.gov.uk

Second bite at LLP avoidance

Landlords were warned about a similar scheme in October 2023.

Then, tax advisers claimed landlords could save tax on their property profits, CGT and IHT by transferring their businesses to an LLP.

The scheme involved setting up a company and an LLP as a hybrid business model to blend the tax benefits of both entities. At the same time, landlords remained basic rate taxpayers because the new business set-up did not personally impact them.

HMRC argued the scheme did not work as the tax pick'n'mix menu was not allowed due to anti-avoidance rules.