HMRC have published Tax Avoidance Spotlight 69 'Liquidation of a Limited Liability Partnership used to avoid Capital Gains Tax', highlighting a scheme used by landlords to reduce their tax liability.
The arrangements
HMRC states that the schemes typically operate as follows:
- An existing business operates for most of its active life as an unincorporated business.
- The individual landlord incorporates a Limited Liability Partnership (LLP).
- The landlord transfers their rental properties, often with substantial accrued capital gains, to the LLP at market value.
- After a short period, the LLP is put into Members’ Voluntary Liquidation (MVL).
- The properties are then sold to a limited company owned by the landlord or connected parties (if continuing with the business).
- For the purposes of the MVL, the LLP is seen to acquire its assets at the time of the contribution for their market value.
The structure is claimed to result in less tax being paid as:
- It enables the landlord to transfer properties into a company tax-free, without needing to apply Capital Gains Tax (CGT) Incorporation Relief.
- There is no CGT due on the contribution of the property to the LLP. On disposal by the LLP, there is a tax-free uplift in the CGT base cost to its value at the time of contribution
- No Stamp Duty Land Tax (SDLT) liability arises on the transfers of the property into the LLP or in respect of any subsequent transfer into a limited company, due to the special provisions for transfers of chargeable interests to and from partnerships at Schedule 15 of Finance Act 2003.
- There are potential Inheritance Tax (IHT) benefits in the form of Business Property Relief (BPR).
HMRC's view
HMRC’s view is that this scheme does not work to save CGT, SDLT or IHT.
- For MVLs entered into on or after 30 October 2024, Finance Act 2025 introduces section 59AA into the Taxation of Chargeable Gains Act 1992.
- Subsections 59AA(2) and (3) provide that the member transferring the asset (property) is treated as making a disposal immediately before it was contributed to the LLP, with the gains accruing at the time the asset is disposed of by the LLP.
- This means that the landlord will be liable for CGT on the difference between the value paid for the asset and its market value at the date it was contributed to the LLP.
- Due to the pre-arranged steps taken by these schemes, HMRC’s view is that section 75A of the Finance Act 2003 needs to be considered.
- This legislation was introduced in 2006 in response to schemes that looked to reduce or eliminate a charge to SDLT in a way that was against the intention of the SDLT legislation.
- A property rental business is likely to be within the ‘making or holding investments’ exclusion from BPR at section 105(3) of the Inheritance Tax Act 1984.
HMRC is considering whether the General Anti-Abuse Rule (GAAR) may apply to these schemes.
What to do if you are using this arrangement
HMRC recommend that anyone using the arrangements described withdraw and settle their tax affairs. This might involve getting independent tax advice.
Promoters
The spotlight reminds promoters of the scheme that they must disclose it to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or face initial penalties of up to £600 per day, potentially increasing to £1m in some cases.
In addition, HMRC:
- Can Publish information about tax avoidance schemes and the people involved in their supply and marketing.
- Will pursue anyone who promotes or enables tax avoidance. This includes using the Enablers penalty regime for anyone who designs, sells or enables the use of abusive tax avoidance arrangements which are later defeated by HMRC.
- Will also use their powers under the Promoters of Tax Avoidance Schemes regime against those who continue to promote tax avoidance schemes.
Useful guides on this topic
Incorporation: Property business/Buy-to-let
What relief can I claim if I incorporate my residential property business? What claims and elections do I need to make? What are the Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT) implications?
Land & Property: an Adviser's Tax Update 2025-26
Land and Property taxes: a comprehensive review of the sector offering a topical CPD update. Hot topics for advisers include issues concerning the abolition of the Furnished Holiday Let (FHL) regime and the recent Spring Statement 2025 announcement that MTD for landlords with income above £20,000 will be brought forward to April 2028.
CGT: Rollover (Incorporation s.162) Relief
Incorporation Relief is available to individuals. Gains from the disposal of business assets on incorporation can be deferred. What assets are included? How does the relief work?
Incorporation: SDLT & property partnerships
What are the Stamp Duty Land Tax (SDLT) implications of incorporating my property partnership? Are there any reliefs available? When do the anti-avoidance rules in s.75A-75C Finance Act 2003 apply to partnerships?
IHT Business Property Relief
A guide explaining what Business Property Relief is, when it can apply and pitfalls and planning points.
Is it a trade, a business, or an investment activity?
Starting in business or running one? Is your new or existing business a trade, a business or an investment activity? The distinction is very important for tax purposes. This guide runs through key issues for tax purposes.
External link
HMRC: Liquidation of a Limited Liability Partnership used to avoid Capital Gains Tax (Spotlight 69)