HMRC have published, and in May 2025 updated, Tax Avoidance Spotlight 63: ‘Property business arrangements involving hybrid partnerships.’
The spotlight, published in October 2023, covers a much-publicised scheme being marketed as a tax planning option for individual property landlords which is being referred to as a ‘hybrid business model’.
HMRC updated the spotlight in May 2025. The updates are prefixed with 'UPDATE May 2025:' below.
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, with the LLP then allocating profits to its members on a discretionary basis. The scheme providers claim that the arrangements allow landlords to:
- Avoid Mortgage interest relief restrictions allowing increased deductions for such interest.
- Reduce the tax payable on profits generated by the property business.
- Reduce Capital Gains Tax (CGT) when the properties are sold.
- Reduce Inheritance Tax (IHT) payable in respect of the properties on death.
The arrangements are claimed to work as follows:
- The individual landlords and/or their family members set up a limited company.
- They then also set up an LLP alongside the limited company, with the company being a corporate member of the LLP.
- The individual landlords transfer their properties to the LLP.
- The members of the LLP allocate the LLP profits to themselves on a discretionary basis to ensure that:
- The individual members remain basic rate taxpayers.
- Remaining profits are allocated to the corporate member.
- The corporate member claims a deduction for finance costs (such as mortgage interest) relating to the properties.
Landlords are being advised that the arrangements result in less tax being payable as:
- There are no upfront tax costs incurred in contributing the properties to the LLP, and the properties’ base costs are uplifted to market value at the date of transfer for CGT purposes, thereby reducing the CGT due on a future sale of the properties.
- The landlords remain basic rate taxpayers so are not impacted by finance cost restrictions.
- The corporate member claims a full deduction for its share of finance costs as the restrictions do not apply to it.
- The corporate member is subject to Corporation Tax on its net profit share instead of the higher or additional rates of income tax that would apply if the profits had been allocated to the landlords.
- Business Property Relief (BPR) may be claimed in respect of a hybrid structure carrying on a property rental business resulting in full relief from Inheritance Tax on the death of the landlords.
HMRC’s view is that the scheme does not work as the following anti-avoidance legislation will apply:
- The Mixed member partnership legislation at s.850C and s.850D ITTOIA 2005 details how excess profits of a corporate member of an LLP are reallocated to individual members.
- The Disposal of income streams through partnerships rules in Chapter 5AA, S809AAZA of the Income Tax Act 2007, which applies to charge the corporate members’ income on the transferor of the income stream i.e. the landlord.
- S.59A TCGA 1992 treats any dealing in chargeable assets by an LLP as by the individual members since LLPs are transparent for tax purposes, meaning that members own a fractional share of assets, and this means that the base cost of properties are unchanged following their introduction to an LLP.
- UPDATE May 2025: The transfer of properties to the LLP and changes in the discretionary profit share of the LLP profits are in scope of Stamp Duty Land Tax (SDLT).
- Finance Act 2003 paragraph 10 Schedule 15 applies to the initial transfer of the chargeable interests to the LLP.
- The LLPs in these arrangements fall within the definition of a ‘property investment partnership’ for SDLT, and therefore paragraph 14 Schedule 15 will apply where there is a transfer of an interest in the property investment partnership; this happens when there are subsequent changes in entitlement to the income profits of the LLP.
UPDATE May 2025: HMRC note that companies and partnerships with company members (including LLPs) that hold a beneficial interest in UK residential property valued at more than £500,000 are subject to the Annual Tax on Enveloped Dwellings (ATED).
- Relief from ATED may be available for qualifying property rental businesses, but this relief must be claimed in an ATED return or Relief Declaration Return.
- Penalties apply for failing to file an ATED return or Relief Declaration Return on time
In addition, HMRC considers that a property rental business is likely to be within the exclusions from Business Property Relief at s.105(3) IHTA 1984 as it involves the ‘making or holding investments’, and the use of the hybrid business model does not change the availability of the relief here.
Anyone involved in such a scheme is advised to contact HMRC to discuss how they can settle their position by emailing
UPDATE May 2025: HMRC note that, depending on individual circumstances, certain elections and reliefs may reduce the SDLT liabilities arising. These could be significant, and you should check what you may be entitled to.
The spotlight reminds promoters of the scheme that they must disclose the scheme to HMRC under the Disclosure of Tax Avoidance Scheme (DOTAS) rules or face penalties of up to £600 per day.
Useful guides on this topic
DOTAS: Disclosure Of Tax Avoidance Schemes
What are the Disclosure Of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
Penalties: DOTAS
What are the penalties for failure to disclose under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations?
Transfer of assets and income streams through partnerships
What are rules for the transfer of assets and income streams through partnerships? When do they apply?
Mixed members: Partnerships with company members
What is a mixed-member partnership? How are the profits of a mixed-member partnership taxed? What tax adjustments are required? Are there any relieving provisions?
IHT Business Property Relief
A guide explaining what is Business Property Relief, when it can apply and pitfalls and planning points.
External link
Spotlight 63: Property business arrangements involving hybrid partnerships