31 January 2024 deadline for Hybrid LLP’s – Tax Avoidance Spotlight 63

Dec 12, 2023

There is likely to be a good number of taxpayers who have received letters regarding their involvement in Hybrid LLPs, are not sure what to do next and in particular in light of the 31
January 2024 deadline HMRC has set for participants to come forward. Whilst the provider of the spotlighted planning, Less Tax for Landlords, will be providing reassurance
to their clients, there will be some participants who will simply want to withdraw from the arrangements.  These participants will be wondering what the likely cost of withdrawing from the
planning and settling with HMRC might look like.

The first step is to identify what the likely tax advantages are gained as a result of the planning:

Avoiding mortgage interest relief restrictions for higher-rate taxpayers.
Lower tax rates on profits
Lower CGT on property sales
Lower IHT on properties in an estate.

So, the next analysis is to decide which of the 4 tax advantages set out above apply to an individual(s) who used the Hybrid LLP planning:

1. Was mortgage interest relief claimed and if so, was any tax advantage gained because of the planning?
2. Did the inclusion of a corporate member in the LLP result in lower taxes on profits?
3. Has any property been sold since the structure was set up and has the rebasing resulted in less CGT being paid?
4. Has anyone passed away and subsequently a claim for Business Property Relief resulted in less IHT being paid?

It is probable that in most cases 1 and 2 will apply and less often 3 and 4.  Following on from notifying their intention to settle liabilities on the basis the Hybrid LLP planning does not work,
participants (or their advisers) will need to have an outline idea of what the eventual liabilities might be.  What is not clear at the moment is whether large settlements -say over £100k might be
considered as fraud and therefore whether advisors need to be thinking about utilising the Contractual Disclosure Facility /Code of Practice 9.  At this stage, it would appear HMRC is still
working out how the cases will be settled and is open to receiving proposals from taxpayers and their advisors.

Clearly, the potential fraud aspect does need to be monitored and actioned appropriately as our understanding of how HMRC is looking to settle cases develops. Another obvious concern will be taxpayers’ ability to fund settlements.  In keeping with HMRC’s normal practice they will seek to determine the components of the settlement (tax, interest, and penalties) and then discuss how the settlement will be paid.

Whilst installments can be a feature of settling liability with HMRC, they will be an overriding expectation on the part of HMRC that taxpayers fully explore all means of paying the due amount prior to agreeing to any deferred payment arrangement.  This will include selling property and or raising finance.

Any settlement will likely include a credit for any taxes paid by a corporate member of the LLP. For those who wish to settle and put the planning behind them, there is a clear path available albeit it will involve some financial pain.  The alternative is to hold on to the belief that the planning is effective and achieves its aims.  This will undoubtedly involve several years of uncertainty.

If any readers are seeking further advice, please contact us at enquiries@uklandlordtax.co.uk or by phone on 01902 711370. We are happy to have an initial discovery call completely free of charge.

Related blog posts

Changes to UK Company Law: What You Need To Know

Changes to UK Company Law: What You Need To Know

Due to The Economic Crime and Corporate Transparency Act, Companies House is currently undergoing a major transformation. Some of the changes are planned to be introduced from March 2024, while others will be phased in over the next few years. Here are some of the key...

read more
Is It A Repair Or An Improvement?

Is It A Repair Or An Improvement?

As UK property accountants and tax advisers, we are regularly in discussions with our clients as to the correct treatment of expenditure relating to property letting income.  Expenditure will be classified as either Capital or Revenue. Revenue expenditure items are...

read more

Got a question for our landlord tax experts?

If there’s a property tax issue that has you puzzled or worried, get in touch. Everyone on our team loves to talk, especially when it helps people like you find peace of mind.