Spotlight 69: HMRC’s Crackdown on LLP Property Schemes

In recent developments, HM Revenue & Customs (HMRC) has issued Spotlight 69, highlighting a tax avoidance scheme involving Limited Liability Partnerships (LLPs) that landlords have used to bypass Capital Gains Tax (CGT) liabilities. This scheme, which has been marketed to landlords, involves transferring rental properties into an LLP and subsequently liquidating the LLP to transfer assets to a connected company. HMRC has made it clear that this strategy is ineffective and may lead to significant tax liabilities, including interest, penalties, and fees. 

How the Scheme Is Claimed to Work 

The scheme typically follows these steps: 

1. Establishing the LLP: An existing unincorporated business is incorporated into an LLP. 
2. Transferring Properties: The landlord transfers rental properties, often with substantial accrued capital gains, to the LLP at market value. 
3. Liquidation: After a short period, the LLP is placed into Members’ Voluntary Liquidation (MVL). 
4. Asset Transfer: The properties are then sold to a limited company owned by the landlord or connected parties. 

Advocates of this scheme claim that it allows landlords to: 

• Transfer properties into a company without triggering CGT incorporation relief. 

• Avoid CGT on the contribution of the property to the LLP. 

• Achieve a tax-free uplift in the CGT base cost to the property’s value at the time of contribution. 

• Eliminate Stamp Duty Land Tax (SDLT) liabilities on property transfers. 

• Gain potential Inheritance Tax benefits through Business Property Relief (BPR). 

However, HMRC has stated that these claims are not valid and that the scheme does not work as intended. 

Legislative Changes and Their Implications 

To counteract this avoidance scheme, the government introduced Section 59AA into the Taxation of Chargeable Gains Act 1992, effective from 30 October 2024. This provision deems that a disposal occurs when a member contributes an asset to an LLP. The member is treated as making a disposal immediately before the asset was contributed, with the gains accruing up to the time of contribution being chargeable to tax. This change ensures that landlords cannot defer CGT liabilities by using LLPs as intermediaries. 

Furthermore, once an LLP enters liquidation, it is treated as a company for tax purposes, and any gains arising from the disposal of assets are subject to CGT. 

Risks of Using Such Schemes 

Engaging in these tax avoidance schemes can lead to significant financial repercussions. HMRC’s stance is clear: attempting to use LLP liquidations to avoid tax obligations is ineffective and may result in: 

• Additional tax liabilities beyond the amount initially avoided. 

• Interest on unpaid taxes. 

• Penalties for non-compliance. 

• Legal fees and other associated costs. 

It’s crucial for landlords to understand that such schemes do not provide the anticipated tax benefits and can lead to more substantial financial burdens. 

Seeking Professional Advice 

If you’re considering restructuring your property business or are involved in an LLP liquidation, it’s essential to consult with tax professionals or legal advisors. They can provide guidance tailored to your specific circumstances and help ensure compliance with current tax laws. 

For more information on HMRC’s position and the legislative changes, visit the official guidance on GOV.UK. Liquidation of a Limited Liability Partnership used to avoid Capital Gains Tax (Spotlight 69) – GOV.UK 

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