HMRC has designated two structures used by the adviser ‘Property118’ as “tax avoidance schemes”. Property118 are appealing to a tax tribunal, and have asked their clients to provide witness statements. That’s perfectly normal. But what’s not normal at all is that Property118 are directing the content of the witness statements.
It would be serious professional misconduct for a solicitor or barrister to coach a witness in this manner, and the witness statements may now be inadmissible.
The background to the Property118 tax appeal can be found in our previous reports here.
The request for witness statements
It’s usual for a party to a dispute to ask interested third parties to provide witness statements. Court rules require that witness statements from a person should be made in their own words.
That’s not the approach Property118 took in a message they sent their clients on 18 September:
This is not merely asking for witness statements; it’s directing what they should say: “In these witness statements, we want to highlight that the decision to use [the structure] was primarily based on commercial practicality – not on tax advantages”.
Mark Alexander, the founder of Property118, then provided his clients with a list of points to add into their witness statements:
And Property118 have a template they have “95% prepared”:
There seems to be some awareness that it is improper to template witness statements – “similar is good, identical is not”:
The messages above come from Property118’s client forum. Two Property118 clients were so alarmed at what they were being asked to do that they (independently) spoke to lawyers, who contacted us with their clients’ permission.
The consequences
We discussed the likely consequences of Property118’s approach with two tax KCs and two solicitors specialising in tax litigation.
Solicitors and barristers have a duty not to mislead a court or tribunal. It would be serious professional misconduct for a solicitor or barrister to coach a witness or seek to influence the content of a witness statement. The courts have been very unhappy when presented with witness statements which were in reality written by a legal team, not the witness.
We and the lawyers we spoke to thought it was highly unlikely that Property118’s legal team had agreed to this approach. It was much more likely that Property118 were obtaining the witness statements behind the backs of their legal team.
That, however, presents a problem. When and if Property118’s legal team becomes aware of how the witness statements were obtained, it is unclear how they will be able to present them to the tribunal.
Witness statements drafted in this way would probably not be admissible in a civil court1See e.g. paragraph 18.1 of Practice Direction 32 of the CPR: “The witness statement must, if practicable, be in the intended witness’s own words and must in any event be drafted in their own language”. The recent MacKenzie v Rosenblatt case (also linked above) shows how courts can be expected to react when a legal team prepares witness statements.. Tax tribunals have more flexibility2See rule 15 of the First-Tier Tribunal Rules, but we would expect a barrister to be required to, at the least, draw the tribunal’s attention to the fact that a witness statement was, to a significant degree, prepared by Property118 and not the witness. That would then likely undermine the weight the Tribunal gave to the witness statement.
The substance of the issue
The difficulty Property118 are having reflects a common problem faced by promoters of tax avoidance schemes. A judge will expect an answer to the question: “why did you enter into this transaction?” The real answer is: to avoid tax. But if the promoter gives that answer, they’ll likely lose. So they struggle to find some other answer – anything, other than tax. Property118’s attempt to construct witness statements should be seen in this context.
Property118 marketed a structure for landlords. The structure involved the landlords declaring a trust in favour of a company. This supposedly enabled landlords to achieve all the benefits of incorporating their business – lower tax rate, full deduction for mortgage interest, and capital gains tax and potentially inheritance tax advantages. But it avoided all the messy disadvantages of incorporation: needing a new mortgage, having to tell tenants, and moving all the contracts associated with the business.
None of that actually worked as a technical matter. But even if it had, there’s a basic problem with the proposition. The trust structure has no benefit other than tax.
If you incorporate a business in the usual way, that will have a large number of legal and commercial implications. Some are desirable; some are not. But the many changes that flow from the incorporation mean that you can’t usually look at someone incorporating a business and say “this is mainly being done for tax reasons”. There’s too much going on.
Property118’s trust structure had only one benefit: a tax advantage.
Property118 are trying to coach their witnesses into answering the question: “why did you use the Property118 structure instead of incorporating?” That’s the wrong question. The correct question is “why did you use this structure instead of keeping things as they were?”
The only answer to that is: tax.
The main benefit, and perhaps sole benefit, of the structure was tax, and that’s why Property118’s appeal will likely fail.
Photo by Scott Graham on Unsplash
Many thanks to K, H, D, V and T for their help with this article.
- 1See e.g. paragraph 18.1 of Practice Direction 32 of the CPR: “The witness statement must, if practicable, be in the intended witness’s own words and must in any event be drafted in their own language”. The recent MacKenzie v Rosenblatt case (also linked above) shows how courts can be expected to react when a legal team prepares witness statements.
- 2See rule 15 of the First-Tier Tribunal Rules
39 responses to “Witness tampering from tax avoidance firm Property118?”
For me incorporation wasn’t about tax at all. I wanted to expand and the interest coverage ratio for personal loans meant the loan to value was severely restricted to, in reality, about 50%. Via a limited company I could get 75% loan to value. I went to a number of accountants about incorporation some who suggested I get a non-statutory clearance while others said this was no longer possible as the department was shut. The HMRC helpline wasn’t that helpful and seemed to have missed some of the key considerations outlined in the judges comments on the Ramsay case regarding what activities counted towards the 20 hours requirement listed in the CGT manual. I worked full time in my business and had significant capital gains so could not risk getting it wrong and HMRC compliance picking up a mistake and saying I owed hundreds of thousands in tax. P118 were used because they had previously obtained clearances from HMRC and had completed lots of incorporations and knew how to issue the shares correctly etc and it was backed up by professional insurance. You are being disingenuous when you say this is easy stuff because it is not well understood by accountants or even HMRC themselves. I remortgaged as soon as l could in the limited company and used the new mortgages to expand, as was my plan all along. The mortgage brokers and lenders were happy with the incorporation documents. I’m not sure how you could prove to the mortgage lenders the incorporation had happened to get the mortgages in the company name without the incorporation documents. This is beyond most lay people I think. In principle the idea of incorporation is understandable but in practice how the details work is not well understood by landlords. To say the only reason to incorporate and use p118 is for tax reasons is wrong, which I suspect you know. Each case is unique and the motivations are individual to each person. I didn’t really need the trust structure but wanted somebody to handle my incorporation who had done it before and knew what they were doing. If you have ever bought a single property then getting solicitors to get everything set for a particular day is tricky so getting multiple mortgages all lined up for multiple properties on a single ‘incorporation day’ would be extremely difficult so an advantage of the trust structure is that it allowed the properties to be remortgaged as soon as possible but without the added stress of it all needing to be completed on a single day. That was really the only advantage of the trust structure for me. I don’t see where the tax advantage is.
I’ve seen a few cases like this, where P118 advised people to use the trust structure for no reason at all. It resulted in unnecessary fees, and a completely unnecessary level of tax risk, given all the problems with the trust structure. A normal tax adviser would never have advised anybody to do this – but P118 had no tax expertise. They also lied to you about the insurance – it doesn’t in practice provide clients with protection unless they sue the barrister and win in court… and even then all the clients would have to share the fairly limited insurance cap.
I appreciate incorporation is complicated for the layperson, but for a tax specialist it is not a complicated arrangement. Any lawyer or accountant with tax expertise could handle it without breaking a sweat – but they’d never use a trust.
The trust structure gives all the benefits of incorporation and presumably the same consequences but the added benefits of flexibility in terms of refinancing so it’s not all about tax…
no it doesn’t, because legal liability for the lease, the mortgage and everything else remains with the landlord. The finance situation is much worse if the lenders become aware of the trust, because it breaches most loan terms. The only advantage is if lenders are unaware. There are only a handful of lenders who will touch the trust structure, possibly not even that now.
Will try again…You state
“Property118 are trying to coach their witnesses into answering the question: “why did you use the Property118 structure instead of incorporating?” That’s the wrong question. The correct question is “why did you use this structure instead of keeping things as they were?”
The only answer to that is: tax.”
In response, I would suggest I was looking to incorporate for the obvious commercial reason of obtaining mortgage interest relief. There were other reasons including estate planning and the ability to refinance into my retirement years. This method provided a solution that enabled the business to
retain an existing financing structure that that at the time was based upon standard variable rates of interest (SVR) at an incredibly advantageous average rate of 0.75% above base (the majority of our portfolio was secured on this basis and were were not keen to relinquish it until we had to). To refinance the entire business would have meant moving (33 properties) to a fixed rate of about 3.75% plus legal fees, conveyancing fees, valuation fees etc, etc. This was in 2019. Subsequently we have chosen to refinance the business in order to expand at a time of our choosing. How is this not for commercial reasons? We have managed to refinance gradually, moving the beneficial ownership of properties into the Ltd. company as we do so. Now 100% of the properties which were held in trust have been moved into the Ltd company. The last properties were moved off SVR, refinanced and out of trust when we saw interest rates rising. It’s a great model and has helped our business.
It most definately in not all about the tax.
How is this only about tax?
I’m afraid “I was looking to incorporate for the obvious commercial reason of obtaining mortgage interest relief” is the kind of tax motivation that knackers everything. You need to take proper advice from an independent and qualified tax adviser before you end up in a huge mess.
You state:
“This supposedly enabled landlords to achieve all the benefits of incorporating their business – lower tax rate, full deduction for mortgage interest, and capital gains tax and potentially inheritance tax advantages. But it avoided all the messy disadvantages of incorporation: needing a new mortgage, having to tell tenants, and moving all the contracts associated with the business.
None of that actually worked as a technical matter.”
Can I ask how “it does not work as a technical matter” if it does indeed provide the benefits of incorporation?
It was supposed to get the same benefits as incorporation but nobody involved had a clue about the technical tax. It’s all in some detail here https://taxpolicy.org.uk/property118 but in short: breaches mortgage deed, no deduction for company, potential taxation on indemnity receipts for individual landlord. Then I actually saw the documents they used and realised it was worse: https://taxpolicy.org.uk/2023/11/09/badly/
Property118 is an online discussion forum for landlords, designed to offer support and information sharing. It’s important to note that the landlords impacted by S24 tax changes were paying their taxes and not seeking to evade them.
In 2016, Property118 supported a judicial review of Section 24 of the Finance Act (No. 2) 2015. Landlords have been trying to do the right thing.
Whilst tenant groups were celebrating the tax increase. However, it is a waste of money for landlords to spend tens of thousands of pounds on accountants, lawyers, and other professionals just to navigate these complexities. What benefit did this have to economy or the tenant?
If a property has “gross” rental income of £1 an hour, how can you justify spending £100-£450 per hour on professionals fees? Now, these folks have to pay for tax specialists.
What benefit was this to a tenant?
With rising interest rates, it a double whammy of taxes going up and finance costs going up.
Rents are going up, but it is all going into the pockets of banks and the treasury.
Rather then spending money on replacing that that troublesome boiler or roof, people have to spend on constant repairing, as they cannot afford to replace.
This lack of resources puts them at risk of litigation if they can’t comply with housing regulations.
Some landlords have chosen to sell up. For example, lettings relief, which until 2020 allowed landlords to claim up to £40,000 (£80,000 for couples) in capital gains tax relief on a property they previously lived in, has now been removed. Many had to sell before it was removed.
This isn’t about coaching; I am already aware of the hurdles of incorporations. It has often been discussed at various landlord seminars. It serves as a quick mental reminder of why Property118’s approach offers advantages over incorporation.
For instance, consider point 23 in the list above relating to licensing under the Housing Act 2004. A property license lasts for five years but must be renewed. If a landlord spends £1,000 on a license, they will need to reapply when the property is moved to a limited company. It is money for old rope. The old license is neither transferable nor partially refundable. Additionally, the new license does not always last the full five years, if people joined midway of the scheme. A bit like going to the cinema mid-way through a movie (Note: some councils may have different policies).
We need to start with the proposition that Section 24 of the tax change, was a vindictive move against private landlords (but not corporations).
The new Duke of Westminster did not pay billions on his £9bn inheritance.
We have a two tier tax system one of the super-rich and the other everyone else.
bear in mind that landlords are the only people who get a tax deduction for interest on a non-trading business.
The failures of regulation of both barristers and solicitors, or maybe just their propensity to bad behaviour, is all shocking but no longer surprising.
I’m very doubtful this involved barristers or solicitors.
I would suggest that the only/main reason is not tax. In a lot of cases it may well be long term estate planning, it is far easier to pass on company shares either during life or on death than it is to pass on properties. A company is also useful for inter-generational planning, as are trusts. So it would be unreasonable to say that the main reason for moving assets into a company is tax planning.
I have no particular axe to grind on this matter, I do not have any connection to Property 118 and have never used, or recommended, their arrangements.
that’s a good reason for incorporation; it’s not a good reason for the trust structure.
The trust structure only has one purpose, to avoid the need for costly and difficult to obtain refinancing. It has no effect on the tax outcome. So what’s your point?
You’re comparing the trust structure to a normal incorporation. That’s the wrong test. The question is what’s the benefit of the trust structure vs continuing to hold as an individual? The answer is: tax. That’s before we get to the other weird features of the structure, like retrospectively claiming a partnership has always existed, claiming a poorly drafted indemnity enables a loan relationship debit, or throwing money around in a circle and claiming that creates a director loan.
“You’re comparing the trust structure to a normal incorporation.” No I’m not.
I made clear the purpose of the trust structure, to avoid the need for costly and difficult to obtain refinancing. That has nothing to do with tax. Your statement makes no sense.
If the landlord chooses to use a trust structure to avoid the need for costly and difficult to obtain refinancing and the use of that trust structure makes not one bit of difference to the tax outcome compared to what you call a “normal” incorporation, then how has that got anything to do with tax?
Your statement is just plain wrong. Your understanding of why anyone would choose to use the trust structure is just plain wrong.
I posit that you have no understanding of why the trust structure is used and you choose to state that it has to do with tax when anyone can see that it makes to difference to the tax outcome.
You misunderstand me.
The relevant question is: “what was the reason you used the trust structure, as opposed to doing nothing?” The answer is: tax.
You’ve answered a different question: “what’s the reason you used the trust structure, rather than a normal incorporation?” Wrong question.
It’s pretty silly of you to assume I don’t understand about the refinancing. I’ve mentioned it throughout. I and the many other tax professionals who’ve commented on the Property118 structure immediately saw that DOTAS was a problem. Mark Alexander has no expertise, and tries to understand tax by speaking to ChatGPT. Cotswold Barristers had no tax expertise at all, and when Mark Smith tried to explain DOTAS he got it so wrong he had to delete his article.
These people are clowns. It’s hard for many of their clients to admit they appointed unqualified people as tax advisers, but that’s what happened. If you want to help yourself, instruct someone qualified to advise you. Plenty of good advisers out there.
“You’ve answered a different question: “what’s the reason you used the trust structure, rather than a normal incorporation?” Wrong question.”
Again, you’re wrong.
The question you should ask a landlord who has incorporated is “Why did you choose to incorporate?”, not “What method did you choose to incorporate?”
However, the answer is actually irrelevant, as the right to incorporate is a statutory right permitted by law and the GAAR guidance even says that incorporating a business to pay less tax is not “tax avoidance” and is not considered abusive.
Ok, don’t believe me, even though I advised on DOTAS for years and was regularly listed as one of the leading tax lawyers in the country.
Find someone, anyone, with tax qualifications and ask them. You’ll get the same answer.
I did – and I did not receive the same answer – which is why I am pressing you on this issue.
So, having asked the question “Why did you choose to incorporate?” and establishing that a business owner can incorporate their business for whatever reason, even if partly to reduce tax (which is perfectly acceptable, as per the guidance), then the second question I put forward is “What method did you choose to incorporate?”
Let’s assume that the answer to that question is that the business owner used what you like to refer to as a “normal incorporation” (i.e. transfer of legal and beneficial ownership simultaneously – although there is no such thing as a “normal incorporation”), then using your logic, because the incorporation was at least partly tax-motivated, then the business owner is guilty of aggressive and abusive tax avoidance.
Therefore, you are ipso facto accusing all business owners who choose to incorporate their business, no matter what method they choose, of being tax avoiders and deserving of punishment.
No, I am not. I will have one more attempt
1. The question is whether one of the main benefits of the thing you are doing is to get a tax advantage.
2. Incorporation has many consequences. So it can’t be said its main benefit is tax
3. The trust structure has very few consequences other than tax. Arguably none. So its main benefits include the obtaining of a tax advantage. DOTAS applies.
And again: the people who designed the P118 structure were completely unqualified. The barrister involved had no tax experience and didn’t understand these rules.
OK, so you have offered one benefit of incorporation – segregated liability. However, you have still not answered my second question.
“Would you care to explain why those benefits are not obtained when using the trust structure?”
You have not provided any evidence to back up your claim that the trust structure does not fulfil the same benefits. I am sure that, if such evidence exists by reference to legislation or case law you will know it, so please share it.
because the trust structure means all the contracts stay with the landlord, who retains all liability!
“because the trust structure means all the contracts stay with the landlord, who retains all liability!”
You are not being truthful with your readers about how English trust law works and the liability of a trustee to the beneficiary.
I asked a simple question and I asked you if you can provide any evidence to back up your claim that the trust structure does not fulfil the same benefits, by reference to legislation or case law.
You have so far not provided any such evidence. Would you care to?
You don’t understand trust law. Please speak to a lawyer.
Is your silence on the matter a pause for reflection?
“You don’t understand trust law. Please speak to a lawyer.”
Interesting, because I do understand trust law very well. However, it appears that you do not. You have ducked my requests for evidence of your assertions at every opportunity. Why is that? Are you unable to provide evidence to back up your opinions?
I’m sure your readers will start to wonder why you can’t respond to any simple request for evidence of your assertions. I believe I know the answer.
Let’s try again…
For the third time, would you care to offer any evidence of your assertion that limitation of liability is not achieved with the trust structure?
It’s not complicated.
1. I am an individual landlord. I am personally liable to the tenant, the bank, and everyone I contract with. I can cover such liabilities with rental income or by selling the property, but if that’s insufficient then I remain personally liable.
2. I own a company which is the landlord. The company is liable to the tenant, bank, etc. I am not. If the company’s assets are insufficient to cover the liabilities, nobody can come after me. That’s one big advantage to incorporation.
3. I am a landlord. I declare a trust in favour of a company. I am personally liable to the tenant, etc. I can cover the liabilities with rental income or by selling the property (technically via have an indemnity) but if that’s insufficient I remain personally liable. This is basic trust law.
The liability positions in 1 and 3 are *exactly* the same. If you understood trust law, you would know this. Please speak to a lawyer and an independent and qualified tax adviser.
“2. Incorporation has many consequences. So it can’t be said its main benefit is tax”
Would you care to name some of the benefits of incorporation other than tax?
“3. The trust structure has very few consequences other than tax. Arguably none. So its main benefits include the obtaining of a tax advantage. DOTAS applies.”
Would you care to explain why those benefits are not obtained when using the trust structure?
incorporation means the mortgage, lease and all other contracts go to the company. That has advantages – segregates liability. But also disadvantages – B2L mortgages are harder to get.
The trust structure means the mortgage and all the contracts stay with the landlord. That likely breaches the mortgage, but the intention is that nothing changes. The only change is the tax.
You keep ducking the problem here: that nobody involved had a clue about tax. P118 had zero trained tax personnel. Cotswold Barristers had zero tax barristers. They can’t even draft a trust deed correctly, but then copied/pasted exactly the same document across hundreds of clients without noticing the errors. Total clowns. They don’t deserve your loyalty.
‘we would expect a barrister to be required to, at the least, draft the tribunal’s attention to the fact that a witness statement was, to a significant degree, prepared by the taxpayer themselves’
Should that be ‘was not’?
thanks
If a court received witness statements which were incredibly similar due to 95% being based from a template, wouldn’t they spot this might be a potential case of tampering?
Barristers owe duties to the Court but are not officers of the Court
thank you! Corrected!
Pleasure