Property business arrangements involving hybrid partnerships (Spotlight 63)
Source: gov.uk (2025-05-16)

Find out about a scheme used by individual landlords to avoid paying tax on their property income and reduce Capital Gains Tax and Inheritance Tax.

HMRC is aware of a scheme being marketed as a tax planning option available to individual property landlords to structure their property business. Sometimes referred to as a hybrid business model, the arrangement claims to:
- bypass mortgage interest relief restrictions allowing increased deductions for mortgage interest
- reduce the tax payable on profits generated by the property business
- reduce Capital Gains Tax payable when properties are sold
- reduce Inheritance Tax payable on death
HMRC’s view is that this scheme does not work. People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.

How the arrangements claim to work

The arrangements seek to avoid tax by allowing individual or joint property landlords to transfer their properties to a limited liability partnership (LLP) with a corporate member. The LLP then allocates profits on a discretionary basis to members.

The arrangements are claimed to work as follows:
- The individual landlords or their family members, or both, set up a limited company.
- The individual landlords set up an LLP alongside the limited company — the limited company is considered the corporate member.
- The individual landlords transfer their properties to the LLP.
- the individual members remain basic rate taxpayers
- the remaining profits are allocated to the corporate member
- The corporate member claims a deduction for finance costs (such as mortgage interest) relating to the properties.
Landlords are advised that this arrangement results in less tax being payable for the following reasons:
- the transaction relating to the contribution of properties to the LLP has no upfront tax cost and the properties’ base costs (the amount that can be set against the sale price of an asset when calculating Capital Gains Tax) are uplifted to their market value at the date of transfer for Capital Gains Tax purposes
- the landlords remain basic rate taxpayers meaning they are not impacted by finance cost restrictions
- the corporate member can claim a full deduction for its share of finance costs as finance cost restrictions do not apply to it
- the corporate member is subject to Corporation Tax on its net profit share instead of paying higher or additional income tax rates that would apply if the profits had been allocated to the landlords
- calculating the capital gain using an uplifted base cost at the date the properties are contributed to the LLP reduces the Capital Gains Tax paid compared to using the original purchase and improvement costs, if the properties are sold
- Business Property Relief (BPR) may be claimed in respect of a hybrid structure carrying on a property rental business resulting in no Inheritance Tax being due, if the landlords die
HMRC’s view of the arrangements

HMRC’s view is that this scheme does not work as the arrangements are primarily caught by:
- mixed member partnership legislation contained in Income Tax (Trading and Other Income) Act 2005, S850C and S850D, which details how excess profits of a corporate member of an LLP are reallocated to individual members
- disposal of income streams through partnerships anti-avoidance legislation contained within Income Tax Act 2007, Chapter 5AA, S809AAZA, which applies to charge the corporate members’ income on the transferor of the income stream (the landlord)
- Taxation of Chargeable Gains Act 1992 S59A, which treats any dealing in chargeable assets by an LLP as by the individual members — LLPs are transparent for tax purposes so members own a fractional share of assets, and this means the base cost of properties are unchanged following their introduction to the LLP
- a property rental business is likely to be within the exclusions from BPR of ‘making or holding investments’ under the Inheritance Tax Act 1984, s105(3) — the use of the hybrid business model does not change the availability of such relief
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
the transfer of properties to the LLP and changes in the discretionary profit share of the LLP profits are in scope of Stamp Duty Land Tax (SDLT)
- Finance Act 2003 paragraph 10 Schedule 15 applies to the initial transfer of the chargeable interests to the LLP
- the LLPs in these arrangements fall within the definition of a ‘property investment partnership’ for SDLT, and therefore paragraph 14 Schedule 15 will apply where there is a transfer of an interest in the property investment partnership — this happens when there are subsequent changes in entitlement to the income profits of the LLP
What to do if you’re using this arrangement

If you think you’re already involved in this arrangement 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.

Depending on individual circumstances, certain elections and reliefs may reduce the SDLT liabilities arising. These could be significant and you should check what you may be entitled to.

If you’re using this or similar schemes or arrangements, HMRC strongly advises you to contact HMRC 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
- provide additional support in reaching resolution
Anyone concerned about the schemes they are currently using should also 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) ensuring that arrangements 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

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 arrangements which are later defeated by 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 arrangements, 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.