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  • Writer's pictureMaplebrook Services

HMRC Attacks Hybrid Partnership Portfolio Planning

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.

House with a for sale sign outside

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:

  1. The individual landlords or their family members, or both, set up a limited company.

  2. The individual landlords set up an LLP alongside the limited company — the limited company is considered the corporate member.

  3. The individual landlords transfer their properties to the LLP.

  4. The members of the LLP (the individual landlords and corporate member) allocate the LLP profits to themselves on a discretionary basis to make sure that:

  • The individual members remain basic rate taxpayers

  • The remaining profits are allocated to the corporate member.

5. 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.

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. Click here to find out how to contact HMRC for support.


If you require any support with professional landlord planning, please contact our friendly team to find out how we can assist you. Call us on +357 26600780 or send an email to


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