Liquidation of a Limited Liability Partnership used to avoid Capital Gains Tax (Spotlight 69)
Source: gov.uk (2025-04-28)

Find out about a tax avoidance scheme used by landlords to reduce their tax liability.

HMRC is aware of a tax avoidance scheme being marketed to landlords, which enables them to transfer their property business to a company using a Limited Liability Partnership (LLP), to save Capital Gains Tax.

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 as well as paying interest, penalties and fees for using such schemes.

How the schemes are claimed to work

The schemes typically work as follows:
- An existing business operates for most of its active life as an unincorporated business.
- The individual landlord incorporates an LLP.
- The landlord transfers their rental properties, often with substantial accrued capital gains, to the LLP at market value.
- After a short period, the LLP is put into Members’ Voluntary Liquidation (MVL).
- The properties are then sold to a limited company owned by the landlord or connected parties (if continuing with the business).
- For the purposes of the MVL, the LLP is seen to acquire its assets at the time of the contribution for its market value.
Landlords are advised the structure results in less tax being paid for the following reasons:
- it enables the landlord to transfer properties into a company tax-free without needing to apply Capital Gains Tax incorporation relief
- there is no Capital Gains Tax due on the contribution of the property to the LLP, and on disposal by the LLP there is a tax-free uplift in the Capital Gains Tax base cost to its value at the time of contribution
- no Stamp Duty Land Tax (SDLT) liability arises on the transfers of the property into the LLP or in respect of any subsequent transfer into a limited company, due to the special provisions for transfers of chargeable interests to and from partnerships at Schedule 15 of the Finance Act 2003
- there are potential Inheritance Tax benefits in the form of business property relief (BPR)
Why you should not use these schemes

HMRC’s view is that this scheme does not work to save:
- Capital Gains Tax
- Stamp Duty Land Tax
- Inheritance Tax
For MVLs entered into on or after 30 October 2024, as part of Finance Bill 2024-25, the government is introducing section 59AA into the Taxation of Chargeable Gains Act 1992.

Subsections 59AA(2) and (3) state that the member transferring the asset (property) is treated as making a disposal immediately before it was contributed to the LLP, with the gains accruing at the time the asset is disposed of by the LLP. This means that ‘the landlord’ will be liable for Capital Gains Tax on the difference between the value paid for the asset, and its market value at the date it was contributed to the LLP.

Due to the pre-arranged steps taken by these schemes, HMRC’s view is that section 75A of the Finance Act 2003 needs to be considered. Section 75A was introduced in 2006 in response to schemes that looked to reduce or eliminate a charge to tax in a way which was against the intention of the SDLT legislation.

Companies and partnerships with company members (including LLPs) that hold a beneficial interest in UK residential property valued at more than £500,000 are subject to the Annual Tax on Enveloped Dwellings (ATED). Relief from ATED may be available for qualifying property rental businesses, but this relief must be claimed in an ATED return or Relief Declaration Return. Penalties apply for failing to file an ATED return or Relief Declaration Return on time.

A property rental business is likely to be within the ‘making or holding investments’ exclusion from BPR at section 105(3) of the Inheritance Tax Act 1984.

HMRC is also considering if the general anti-abuse rule (GAAR) may apply to these schemes. Transactions after 14 September 2016, where the GAAR applies, will be subject to a 60% GAAR penalty.

What to do if you’re using this scheme

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.

If you’re using this or similar schemes, HMRC strongly advises you to withdraw from it and settle your tax affairs. You can do this by emailing HMRC at xxx@xxx.xx (mailto:xxx@xxx.xx) and we will tell you what further information we require.

Anyone concerned about the schemes they are currently using should consider:
- getting independent, professional tax advice (https://www.gov.uk/tax-help)
- speaking to one of the tax charities such as TaxAid — find out more about the TaxAid helpline on the TaxAid website (https://taxaid.org.uk/pages/taxaid-helpline)
What this means for promoters

Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation (https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview) making sure the schemes they are marketing are disclosed to HMRC (https://www.gov.uk/guidance/forms-to-disclose-tax-avoidance-schemes).

Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within 5 days of the scheme being made available or implemented. The initial penalty is up to £600 a day. If the penalty is calculated to be less than £1 million and this is not considered to be a sufficient deterrent, promoters may have to pay a penalty of up to £1 million.

HMRC can publish information about tax avoidance schemes (https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/information-hmrc-may-publish-about-tax-avoidance-schemes-promoters-enablers-and-suppliers) we are aware of, and about the people involved in the supply and marketing of these schemes.

HMRC will pursue anyone who promotes or enables tax avoidance. This includes using the enablers penalty regime (https://www.gov.uk/government/publications/compliance-checks-penalties-for-enablers-of-defeated-tax-avoidance-ccfs43) for anyone who designs, sells or enables the use of abusive tax avoidance schemes which are later defeated by HMRC.

HMRC will also use its powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.

Report a scheme

You can report tax avoidance schemes and the person offering you them to HMRC using our report tax fraud or avoidance online form (https://www.gov.uk/report-tax-fraud). You can submit this form anonymously and do not have to give your name, address or your email.

You can phone HMRC to report tax fraud or avoidance (https://www.gov.uk/report-tax-fraud) if you cannot use the online form.