Sarah Bradford highlights a tax avoidance scheme being marketed at landlords and explains why it should be avoided.
HMRC has recently published a ‘Spotlight’ (Spotlight 69) drawing attention to a tax avoidance scheme targeted at landlords.
The scheme involves the transfer of the landlord’s property business to a limited liability partnership (LLP), which is subsequently liquidated, to avoid capital gains tax (CGT) on the eventual disposal to a limited company. However, in HMRC’s opinion, the scheme does not achieve its desired objective and anyone using the scheme will be liable for interest and penalties on the tax they sought to avoid, as well as the tax itself.
Legislation introduced in Finance Act 2025 ensures that a CGT charge now arises on a member who contributes assets to an LLP which is then liquidated in their favour or in favour of a connected person.
The scheme
A typical scheme works as follows.
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A landlord has (usually for many years) run a property business (say, in London) as an unincorporated business.
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The landlord incorporates their business as an LLP.
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The landlord transfers their rental properties, which are often pregnant with substantial capital gains, to the LLP at market value.
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After a short period, the LLP is put into a members’ voluntary liquidation (MVL).
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If the business is continuing, the properties are then sold to a limited company owned by the landlord or a connected party.
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For the purposes of the MVL, the LLP is considered to acquire its assets at the time of the contribution for their market value.
Landlords are told that this will result in them paying less tax because it enables them to transfer their properties into a company free of CGT without applying ‘incorporation relief’. There is no CGT when the property is transferred to the LLP, as there is no change in the underlying ownership. Likewise, there is no CGT on the disposal by the LLP to the company, which also benefits from a tax-free uplift in the base cost.
Further, there is no stamp duty land tax (SDLT) to pay on the transfer of the properties to the LLP or from the LLP to the limited company in the above scenario, because special rules apply in respect of interests to or from a partnership. It is also claimed that the scheme will deliver inheritance tax (IHT) benefits in the form of business property relief (BPR).
HMRC’s opinion
HMRC is of the view that the scheme does not work, and has published Spotlight 69 to warn landlords not to be taken in by claims made by the promoters. In HMRC’s opinion, the alleged CGT, SDLT and IHT savings will not be forthcoming.
At the time of the Autumn 2024 Budget, legislation was published in draft for consultation to counter the avoidance of CGT via the use of an LLP which is then liquidated. The legislation was included in Finance Act 2025 and is now contained in TCGA 1992, s 59AA. It applies in relation to liquidations that commence on or after 30 October 2024 (but not to those started before that date).
For tax purposes, a partnership is generally transparent for tax purposes and assets held by an LLP are treated as if held by the members. Consequently, no CGT liability arises when assets are transferred to the LLP, as the ownership of the asset does not change. However, TCGA 1992, s 59A also provides that this treatment ceases to apply on the appointment of a liquidator. It is on this provision that the efficacy of the scheme hinges.
The anti-avoidance rules introduced by Finance Act 2025 counter this by deeming there to be a disposal when an LLP is liquidated and assets that a member has contributed are disposed of to that member or to a person or company connected with them. In the scheme as outlined above, the disposal by the LLP to a company owned by the landlord or a connected person falls squarely within the scope of TCGA 1992, s 59AA.
This means that where the liquidation was commenced on or after 30 October 2024, the LLP will be liable for CGT in the normal way on the disposal of its assets, resulting in a CGT bill for the member on the disposal to the limited company. As the disposal by the landlord is at market value, a chargeable gain will arise on the difference between the amount that the landlord paid for the property and its market value at the date of transfer to the LLP (less costs of acquisition and disposal and any improvement expenditure). However, the CGT savings perceived by the scheme may be forthcoming where the liquidation commenced prior to 30 October 2024.
Other implications
As far as SDLT is concerned, HMRC takes the view that because of the pre-arranged steps taken in using the scheme, the provisions contained in FA 2003, s 75A need to be considered. This, too, is an anti-avoidance provision which was introduced to counter schemes that sought to reduce or eliminate an SDLT charge that was contrary to the intention of the legislation. The anti-avoidance legislation applies where there is a disposal which involves a number of transactions and the SDLT payable is less than would have been due on a direct disposal to the eventual owner. Consequently, HMRC’s view is that SDLT would be payable as if the property had been disposed by the member to the company. The SDLT relief that would otherwise apply on the transfer by a partnership to a limited company is lost.
In the Spotlight, HMRC also highlights the potential for the company to be subject to the annual tax on enveloped dwellings (ATED), which potentially applies where a company holds residential property valued at more than £500,000. However, there are a number of ATED exemptions that can apply, including an exemption for qualifying property rental businesses. The relief is not given automatically and must be claimed. Penalties may be charged if a return or a relief declaration is not filed on time.
It is also unlikely that BPR for IHT purposes will be available, as a rental property business is likely to fall within an exclusion for the ‘making or holding of investments’.
HMRC is also considering whether the scheme may fall foul of the general anti-abuse rule (GAAR), which can be used to counter tax avoidance arrangements that, while within the letter of the law, fall outside the intentions of parliament. Where arrangements fall within the scope of the GAAR, HMRC can make a reasonable adjustment to the tax to counter the avoidance. However, there are taxpayer safeguards in place and the scheme must be put before the independent GAAR advisory panel before a counteraction notice can be issued.
Landlords using the scheme
HMRC strongly advises landlords using the scheme described in the Spotlight or a similar scheme to withdraw from the scheme and settle their outstanding tax liabilities. Landlords affected can contact HMRC by email at spotlight69@hmrc.gov.uk. It is also advisable that they seek professional advice.
HMRC targets promoters of tax avoidance schemes. Promoters of tax avoidance schemes must comply with the disclosure of tax avoidance schemes (DOTAS) legislation. Failure to disclose a tax avoidance scheme will result in significant penalties being charged.
Landlords looking to incorporate
Recent tax changes have led many landlords to consider whether it would be worthwhile to run their business as a property company. However, landlords should be wary of convoluted routes to incorporation that seem to promise tax savings. When transferring properties to a limited company, there is a disposal at market value. However, unless disclaimed, incorporation relief will apply, which will defer the CGT bill until the disposal of the shares received in consideration. The company will also pay SDLT on the acquisition of the properties.
There can be advantages to using an LLP. However, this should be considered in its own right, rather than as an indirect route to running the property business through a limited company.
Practical tip
Schemes that seem too good to be true often are, and landlords tempted by schemes that seem to offer significant tax savings should proceed with caution and take tax expert professional advice.
