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The Ultimate Guide to
LANDLORD TAX PLANNING
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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is continuing to publish tax advice for landlords, in the form of a 36 page ebook (now taken down; but you can read an archived version here).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 2003.1 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.2
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.
Footnotes
The 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”. ↩︎
Because 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. ↩︎
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