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Property 118 Hybrid LLP Model & Tax Policy Associates Comprehensive Analysis


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Table of Content

Table of Content

 Tax Policy Associate (“TPA”) published a Report claiming tax advising company Property118 are using schemes that promise tax reduction wherein, in actuality, the scheme defaults their mortgage and increases their tax bill.

In their words, the report explains the scheme and why, in their view and that of the mortgage lender’s industry body, it is likely to default the landlord’s mortgage.

This article has tried to explain the scheme structure(“model arrangement” “model”) and the tax implications highlighted by the report, including the model advisor’s response and what it means for the landlords and legal implications.

This article takes a reference to materials available on TPA’s website.

The article aims to understand the model and the objections raised by TPA with their claim. This article does not answer whether Property 118 is correct with its model or TPA with its claims.

We hope HMRC will bring a conclusion as to whether the model avoids tax or not.

The MODEL Structure

The model arrangement targets buy-to-let landlords claiming a reduction in their tax bill. The model works with the incorporation of a limited company with the sale of the properties by the landlords to the company in exchange for shares; the landlords are now the shareholders.

Completing the property transfer is simultaneously deferred following the creation of a trust with the landlord as the trustee and the company as the beneficiary. In some models, a partnership is established, and properties are transferred.

The Limited Liability Partnership(LLP) and partnerships provide relief for stamp duty land taxes. All these transfers are on paper, while the landlords retain themselves as property title holders.


MODEL Structure of property 118

The transfers lead to questions regarding the applicability of stamp duty land tax (SDLT) and capital gains tax, at the least, not to mention other tax implications from the model.

Capital gains tax is claimed to be relieved from the model through “Incorporation Relief“, and incurring SDLT is relieved through partnership relief available to partnerships. With the implementation of the model, none of these taxes are incurred.

Incorporation relief is available for converting partnership and sole trader business into a company. Incorporation relief means you will not pay any capital gains. Sole-traders or business partnerships are eligible for the relief.

Therefore, partnerships are fundamental to this tax relief for the model to work. Tax liability is avoided by claiming incorporation relief; no Capital Gains tax (CGT) is paid but is deferred on sale of shares. Stamp Duty Land Tax (SDLT) through the establishment of partnership is relieved.

The formed company, the end goal of the model, termed a “Smart Company“, has significant benefits for the participating landlords. The smart company offsets all finance costs as an expense against rental income and attributes future gains on the property to future generations with no inheritance and personal tax liability—finally, the landlords avail of Corporation Tax advantages on their income and taxation.

The model holder benefits from holding the properties in the company for mortgage interest deduction and Corporation Tax benefits. On the other hand, the landlord will have lowered their income tax slabs from a higher tax bracket to 20%.

The mortgage interest is fully deductible for companies whereas individuals can claim 20% mortgage credit on interest resulting in higher taxes. Under this model, the landlords themselves make mortgage payments while the company reimburse landlords through indemnity payments and deducts them as mortgage interest paid.

The model achieves these tax and financial benefits.

  • Reduced tax on property business profits,
  • Decreased Capital Gains Tax upon property sale,
  • Reduced Inheritance Tax upon landlord’s death

What are the Objections?

The argument against the model arrangement has suggested a series of misapplications of law having significant tax obligations and penalties for landlords. The main argument is that the model is part of a Tax Avoidance Scheme.

The report claims the model arrangement defaults the mortgage because the property transfer to the trust is not disclosed to the mortgage lender.

Lenders have clauses in their mortgage that require disclosure in case the property is ‘transferred, let, grant a trust over or create a new interest in the whole or part of the mortgaged property’, or similar clauses to deter the transfer of mortgage properties without the lender’s consent.

The report claims most lenders have similar contract clauses, a general industry standard practice. Therefore, the model arrangement formed without the lender’s consent most likely defaults the mortgage.

Tax Avoidance Scheme

The transfer of property, as per the report, must include the entirety of the property, including all interest in the property. Since, in the model, landlords maintain the property’s legal interest, the property is not transferred. If the total ownership is incomplete, it would bring about various tax compliance and liability for landlords.

The report maintains that legal title over real estate has reality and value. One cannot borrow without legal title nor refinance or sell. The beneficiary can call for legal title at any time in bare trusts.

The model makes it impossible for the beneficiary to call for legal title, as they would require the lender’s consent.

The smart company has not acquired the whole business’s assets, while it claims for incorporation relief makes mortgage interest deductions. Not to mention the liability on Annual Tax on Enveloped Dwelling (ATED) returns. Failure to file the return incurs penalties.

In the construction of the model and use of partnerships, the reports claim many models were created where husband and wife or joint owners were treated as operating a rental business under Partnerships, without partnership agreement or partnership returns or any evidence on the existence of the partnership.

The report maintains that though these are not exhaustive requirements, the recent SC Properties case has made it challenging to establish a partnership without the above evidence. 

Under the model, there is no segregation of legal liability. The ESC/D32 rule would apply, which does not allow for the transfer of personal liabilities but the transfer of business liabilities from partnerships to companies. As claimed, the mortgage liability in the model remains with the landlords.

The report maintains that as far as the lender, the tenants, and the world are concerned, the landlords remain personally the owner of the properties and, therefore, as a legal matter, remain personally liable.

This model has brought criticism mainly because of its implication in the following financial areas discussed above in a nutshell:

Mortgage Implication

Since the landlord has not disclosed the model arrangement to the lender and does not have the lender’s consent to transfer the mortgage property to the trust, the mortgage is defaulted. Additionally, the bank interest on the mortgage paid by the landlord is not deductible to the landlord; the tax liability for the landlord instead increases.

Capital Gains

Incorporation relief requires the ‘whole of assets of the business’ to move to the company. With the model, the legal title remains with the landlord, meaning the incorporation relief is invalid.

Stamp Duty Land Tax

The question regarding the legitimacy of partnership incorporation remains. The landlords have the burden of proof to show that the partnership exists. That means having partnership agreements, partnership returns, etc.

Tax implication in the following financial areas

Taxation of interest payments

The Loan Relationship Rules in the Corporation Tax Act 2009 prevent the company from claiming a deduction for interest payments if the loan is not for a genuine business purpose. 

Taxability of indemnity payments

The bank interest is not tax deductible for the landlord and is subject to income tax and national insurance contribution.

Inheritance tax

Finally, the model arrangement under the smart company format claims to remove any Inheritance Tax (IHT) liability. The scheme claims that it reduces inheritance tax liability.

However, this is also unlikely to be the case. The shares issued to the landlord’s future generation are likely to have a value subject to inheritance tax.


The report maintains the model arrangement violates several laws and is, in fact, a tax avoidance measure. 

Model  Advisor Response

Property 118, who formulated and implemented the model in a Brief Response, maintains that they have sought independent advice from an independent Tier 1 Tax King's Counsel to confirm the correctness of their approach.

The counsel has presented the finding and has not concluded against Property 118. However, TPA criticises the report for not addressing significant aspects of their claim.

Property 118 maintains that they have worked with HMRC on over 15,000 personal and corporate tax returns with over 20 highly detailed bespoke compliance checks on rental property business, which have been closed with no further tax due.

Property 118 also maintains that various credit teams and legal counsel of several mortgage lenders have scrutinised their work and are happy to extend further lending. None of their client lenders have called in a loan.

None of the detriments forecasts in Dan Needle's article has ever come to pass across this significant body of casework.

HMRC's Position

HMRC has recently released Guidance on Business Arrangements involving hybrid partnerships. The guidance does not incorporate the entirety of the model discussed but does address some of the arrangements covered in the model.

HMRC guidance labels the scheme as tax avoidance, which works by transferring properties from individual landlords to a limited liability partnership (LLP) with a corporate member. The LLP then allocates profits on a discretionary basis to members.

The corporate member can claim a full deduction for finance costs, such as mortgage interest. It is subject to Corporation Tax on its net profit share, typically lower than the income tax rates that would apply to individual landlords.

If the model is concluded to be a tax avoidance scheme, the landlords will have big problems with their tax liability non-compliance, including hefty penalties and interest.

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