We have previously reported on a high profile unregulated firm called “Property118”, which promoted a series of landlord tax avoidance schemes. HMRC took action, and Property118 has resorted to asking their clients to make donations to fund their appeals. Despite this, Property118 continues to promote tax avoidance that doesn’t work and will land its clients in a financial mess.
UPDATE 20 July 2024: HMRC issued a stop notice to Property118 on 18 July 2024, and most of the Property118 website has now been taken down
Property118 is continuing to publish tax advice for landlords, in the form of a 36 page ebook (now taken down; but you can read an archived version here). One of our team, a stamp duty land tax specialist, reviewed the ebook and was alarmed by its contents. We have discussed his concerns with other SDLT experts, and the consensus is that much of the advice is objectively wrong. By this we don’t mean that we disagree with it; we mean that it misses obvious points which a newly qualified tax adviser would immediately identify.
This article is solely focused on two significant SDLT errors. There are other serious problems with the SDLT advice in the ebook, as well as numerous non-SDLT problems (particularly around interest deductibility, capital gains tax and the potential to default a landlord’s existing mortgages). If this was a regulated firm then we expect disciplinary action would be taken. But Property118 is completely unregulated.
Failed SDLT avoidance on incorporation
It is sometimes sensible for landlords to incorporate – i.e. to transfer their properties, and their property rental business, to a company. This should be done with care, and will sometimes cost more in increased tax and financing costs than it saves.
One particular challenge is that, if properties are held by a landlord personally, then when the landlord transfers the properties to a company there will be an immediate SDLT charge.
Property118 think you can get round this by moving property into a partnership, and only subsequently into a company:
This completely ignores the specific SDLT anti-avoidance rule in section 75A Finance Act 2003.1The General Anti-Abuse Rule (not “Rules”) certainly exists, but isn’t terribly relevant to this structure. The fact Property118 mention it (and not s75A) shows their lack of expertise. Indeed a small but telling detail is that nobody in the tax world calls the GAAR the “G.A.A.R” – it’s a bit like calling an ISDA an “I.S.D.A”. Section 75A is an extraordinarily wide rule which the Supreme Court has confirmed applies regardless of the parties’ motives. Having a “legitimate reason” is of no help. The only relevant questions are whether there’s a disposal and acquisition of property, a number of transactions are involved in connection with that disposal/acquisition, and this all results in less SDLT than would have been due on a simple sale.
So if you plan to save SDLT by moving property into a partnership and later from the partnership into a company, then s75A will apply. It doesn’t matter if you wait a week or four years, and it doesn’t matter whether you say this is tax avoidance, or claim you have a commercial rationale. Section 75A doesn’t care about any of that. And taxpayers are expected to apply section 75A themselves under self assessment – it’s not a matter of waiting to see if HMRC applies it (but if a taxpayer doesn’t apply s75A when they should have done, HMRC would likely have 20 years to open an enquiry and would likely impose a tax-geared penalty for failure to make a return).
There are a surprisingly large number of online articles suggesting that you are safe after three years. That is not correct – there is no three year rule here, and possibly people are confusing s75A with an unrelated rule. There is an excellent article by Simon Howley covering these issues.
Section 75A isn’t an obscure provision – all SDLT advisers are very aware of it… and if you google “SDLT anti avoidance rule” you’ll find thousands of helpful articles.
The obvious conclusion: Property118 don’t know what they’re doing. Anyone following their advice risks triggering an SDLT bill far in excess of the expected savings from incorporation.
Increasing your children’s future stamp duty bills
One of the Property118 schemes involves a landlord moving their property into a limited liability partnership, and then adding their spouse and children as members of the LLP. The idea is that rental income is then taxed in the hands of the spouse/children, who are in lower tax bands:
But there’s a big problem with this – it means that the children are deemed to own property (“through” the LLP), and that can have expensive future consequences for them.
First, when/if the children come to buy property, they probably expect to benefit from the special threshold for first time buyers (presently £425K, due to fall to £300K with effect from 1 April 2025).
But will they?
The Property118 ebook says this will be just fine:
But here’s the definition of “first time buyer” in the SDLT legislation. Note how the words “own property” are not used, and instead specific technical terms are used:
The way these terms are defined kills the structure.
When the children are given an interest in the LLP after it has acquired a property, they will likely in practice be a “purchaser in relation to a land transaction” (see paragraph 17 Schedule 15 Finance Act 2003). If they’re a member of an LLP at the time it acquires a property, they’re deemed to enter into a land transaction themselves (see para 2(1)(b) of Schedule 15).
So the children likely won’t qualify as first time buyers when they come to buy a property later in life.
It gets worse. There’s a 3% SDLT surcharge on people buying second/subsequent properties. When the children come to buy their own property, I doubt they expect the surcharge to apply. But it probably will.
The rules are complicated, but broadly speaking, if the child’s interest in a property held by the LLP is worth more than £40,000 then he or she will be treated as already owning an interest in a property.2Because a person holding an interest in an LLP which holds land is treated as if they held the land themselves. The child’s LLP interest will therefore be a major interest in property, which triggers the surcharge rules.
So if/when the child buys property for themselves, not only will they be disqualified from the special first time buyer’s regime, they’ll potentially be hit with the 3% surcharge. This is a very poor result.
How can Property118 get the law so wrong?
Property118 is run by salespeople, not tax experts. As far as we are aware, they employ nobody with any tax or legal qualifications. They used to work in a joint venture with a barrister’s chambers called “Cotswold Barristers”, which again had no personnel with any tax experience (and, as a consequence, made a series of serious errors of law). It’s unclear if that relationship continues, as the Cotswold Barristers branding is no longer present on the Property 118 website.
We recommend that any landlords looking for tax advice approach regulated firms of tax advisers, not unregulated outfits run by salespeople. We set out more thoughts on choosing a tax adviser here.
Does this demonstrate why tax advice should be regulated?
We’re not sure.
The previous Government recently closed a consultation on requiring tax advisers to be regulated. We are, however, doubtful that this would stop Property118 and others like them.
It would be straightforward for Property118 to hire a junior accountant, give them straightforward compliance work, and then claim to be a regulated firm. And Property118’s approach to tax seems to originate with Cotswold Barristers, who were regulated by the Bar Standards Board.
We believe creating the right incentives will likely be more effective than creating layers of new regulation. Stiff penalties for people who promote tax avoidance schemes without disclosing them to HMRC under DOTAS, and perhaps even criminal sanctions.
Thanks to J for spotting these points and writing the initial analysis; thanks to P, T and Sean Randall for their subsequent review.
Excerpts from the Property118 ebook are © Property118 and reproduced here as fair dealing for the purposes of criticism and review.
- 1The General Anti-Abuse Rule (not “Rules”) certainly exists, but isn’t terribly relevant to this structure. The fact Property118 mention it (and not s75A) shows their lack of expertise. Indeed a small but telling detail is that nobody in the tax world calls the GAAR the “G.A.A.R” – it’s a bit like calling an ISDA an “I.S.D.A”.
- 2Because a person holding an interest in an LLP which holds land is treated as if they held the land themselves. The child’s LLP interest will therefore be a major interest in property, which triggers the surcharge rules.
16 responses to “Property118 – more hopelessly wrong tax advice for landlords”
I have read the article by Simon Howley and it appears that creating a partnership before incorporation does avoid salt.
if you create a partnership and then later happen to incorporate then: fine. But if you have an arrangement where you create a partnership and plan to incorporate then it doesn’t work… whether you wait ten minutes or ten years. s75A is a very powerful anti-avoidance rule.
Excellent article! I will avoid these tax advice for Nacstaccs.
Their begging post entitled ‘property118 attacked by bullies’ has been moved way further down their pages now. It was a pinned message for a while and naturally, in true P118 form, they didn’t allow/publish any comments. Unfortunately, a lot of the regular posters there appear to be Cult members, and I’m sure behind the scenes they aren’t as casual as they ‘appear’ to be in the comments section. They are currently openly backing P118’s failing structure, but when HMRC come knocking, they’ll turn on them like Hyenas. No win no fee anyone?
There is at least one firm of solicitors already touting for clients for a group action against them.
I’m sure they will be getting a lot of enquiries right about now. After reading that website’s comments section for quite some time, a lot of people have incorporated using that structure so the amount of fees they must’ve paid will be staggering. Some of the comments mention moving scores of properties over in one go, the SDLT/CGT liabilities will be insane WHEN the music stops. Panic stations.
As an aside, unless I’ve misunderstood the legislation, Mr Patterson and his company also appear to fall foul of the Business Names provisions [ as admittedly do a lot of businesses* ]
Their business web site does not disclose the names of the owners as required by the Electronic Commerce (EC Directive) Regulations 2002).
* To see an example of a business that does comply when you enter Marks& Spencer store if you look to the side of the main entrance you will see the prescribed notice
Regarding P118’s lack of competence when it comes to SDLT, I will share with you an example that recently appeared on their website. A reader had posed a question about selling the shares in the property owning company rather than the property itself to save the purchaser SDLT. All fine and dandy. Problem was the company had other property in it. P118’s advice? Hive the property to be sold down to a new sub, claiming SDLT group relief, and then sell the share in the sub. Plainly they were completely unaware of the withdrawal of group relief when the transferee company leaves the group within 3 years (sch 7 para 3). Indeed, it probably would not even get as far as withdrawal as para 2 would likely deny group relief in the first instance. This is really quite basic stuff and it is scary that they are advising on the basis of such a very poor and limited understanding of the legislation.
On a different point, the item here touches on para 17A of sch 15. I have to say that, although, in practice, HMRC seem never to use this provision, I have always been slightly uncomfortable as to whether it could, in strictness, apply on an incorporation. As I see it, if we are talking about a general partnership then, as a matter of law, the partnership ceases to exist when the properties are transferred to the company. The partnership has no separate legal existence and, given that its business ceases on incorporation, the partnership must also, necessarily, cease. Any capital that was within the partnership will then belong to the partners. Why is this not a withdrawal of money or moneys worth from the partnership? If this is within 3 years of a para 10 contribution of property to the partnership, would a para 17A charge arise? I am not convinced by Simon Hawley’s argument that para 18 over-rides para 17A. There is no specific provision in the legislation to this effect. Nor is there any explicit HMRC statement on the point (as there is, for instance, in relation to the special partnership provisions in sch 15 over-riding the MV rule in s53). In my view there are a couple of possible arguments against para 17A applying. The first would be that, under para 2 of sch 15, a land transaction undertaken by the partnership is treated as undertaken by the partners. Therefore, it is perfectly in order for the shares issued on incorporation to be issued to the partners and this is not a withdrawal of capital as it is the partners who have made the sale for SDLT purposes. I am not convinced by this as the same argument could be applied where the partnership sells a property to a third party and the partners then withdraw the proceeds as a withdrawal of capital. I think it is accepted that, although this would be an unjust result, in strictness para 17A could apply, subject, of course, to there having been a prior para 10 transaction. A better argument, in my view, is that the use of the term “withdrawal” of capital requires some positive action by the partner. If the partnership simply ceases to exist as a matter of law then, although the capital comes out to the partners, there has been no action by the partners to give rise to a “withdrawal” in the normal sense in which that word is used. An analogy might be drawn with a partnership agreement which contains a clause to the effect that the partnership is automatically dissolved on the death of any partner (I understand that such a provision sometimes appears, particularly in agricultural partnerships). If such a death occurred within 3 years of a para 10 contribution to the partnership, then a para 17A charge would, it seems, apply unless the argument that I have set out is accepted. The fact, though, that there is no explicit guidance on the point is less than satisfactory.
If the partnership is an LLP then the analysis is, I think, different. This is because an LLP is a separate legal entity in its own right and can own property. Unlike a general partnership, an LLP does not cease to exist when the property business is incorporated. The shares issued in consideration should, it seems, properly belong to the LLP. Where, as will invariably be the case, they are issued to the members, it seems to me that there is at least a case for saying that there has been a withdrawal of capital. My preferred argument above would not save the day as the LLP still exists. (The first argument would still be valid but, as I explained above, I’m not convinced by that argument). You could avoid any para 17A problem by issuing the consideration shares to the LLP and keeping the LLP in existence until the 3 year para 17A window has expired. However, this would create an altogether different set of problems. It is highly doubtful that holding shares in the company to which the properties have been transferred, as opposed to holding the properties directly, would constitute a “business”. Where an LLP ceases to have a business then, unless the cessation is only temporary, the LLP loses its tax transparency for both capital gains and income tax purposes (TCGA s59 and ITTOIA s863). It then defaults to its legal status as a body corporate and becomes taxable in its own right and subject to corporation tax. I confess I have not through the implications of the move from tax transparency to tax opaqueness as my head was starting to hurt but I doubt that they would be good!
In practice HMRC have never sought to raise the point that para 17A could apply on an incorporation and nobody seems worried about it, so it is all probably academic. However, I am not sure it is an entirely clear-cut issue.
Thanks, Robert – that’s brilliant. I’d never personally advise on these rules without input from a specialist, precisely because of this kind of issue.
I think your post is a bit like a tax on beards in that I was driven to get their book.
What I know about stamp duty can be written on the back of a postal-thingy with a fat crayon and so I skipped those and focused on some of the other exciting opportunities offered. These looked too good to be true to me and so I wondered if this was the first instalment of a 28 part series?
It will not! But if others want to spot points and write them up here, feel free!
I won’t mention the points you’ve made in this post (or the points you’ve made in other posts about mortgages / trusts / LLPs and incorporation). But a quick skim suggests…
1. They know they are not qualified tax advisers.
2. They don’t appear to know anything about the settlements legislation (e.g. (i) “directors can decide which class of shares they wish to receive dividends … One classic use … is to pay dividends to retired parents … and for them to use the money to pay school fees…”, and (ii) in relation to partnerships and passing income to people that aren’t able really able to draw it – see below).
3. They don’t know about the employment-related securities rules. So randomly paying dividends on “freezer shares” at the whim of a director suddenly pushes value into them, so creating a PAYE/NIC charge (Chapter 3B Part 7). Just in case they read this and don’t understand what the bits in brackets mean, they should AskJeeves about “alphabet soup” in *** THE *** manuals. I’m also disappointed about their lack of ambition on share classes. Why stop at A to Q shares? There are way more letters in the alphabet than that – and you can combine them.
4. Shares that get all future capital appreciation sound like they are worth more than a nominal value.
5. I thought about ignoring their “legal definition” of a partnership as it’s not tax but on reflection I’d have thought it would be simple enough to just use the words in the legislation (or should I say, use the words is HMRC’s manuals?).
6. There’s no mention of the salaried members legislation.
7. If drawings “are at the discretion of the Senior Partner” then have the profits really been allocated?
8. There can also be a whole heap of issues with the use of discretionary trusts, but I couldn’t see any mentioned.
My favourite bit that sums my thought up is the Darwin quote. There is no evidence Darwin actually said this. Someone’s basically taken it from [HMRC’s manuals rather than the legislation] a lecture that paraphrased what Darwin said. It’s just like they are doing their best to get things roughly right-ish all the time but just wrong enough that they are not right.
thanks – that’s a great list. On the valuation point, when Property118 were briefly threatening me with defamation proceedings, I told them I was prepared to pay well over the odds for their supposedly zero-value “growth shares” – up to £10, subject to contract. Haven’t heard back but I’m optimistic. Let me know if you’d like to join me in what promises to be a fantastic investment.
An “ISDA”? A somewhat obscure reference, even to this learned audience. Admittedly I retired from practice some time ago, but we used to refer to the “ISDA schedule” and not to an “ISDA”.
Do you perhaps mean to refer to an “I. S. A.”? I have heard mention of this in relation to personal taxes – but somewhat outside my field of expertise 🙂
It is the International Swaps and Derivatives Association
I understand “an ISDA” to mean an ISDA Master Agreement, and in casual usage to include the Schedule thereto, and the Credit Support Annex.