In this article, Richard Gray and Ruby Keeler-Williams of Elysium Law provide practical guidance for individuals navigating the exit process from tax planning schemes, notably those promoted by Less Tax For Landlords.
Let us start by thanking the CIOT for publishing the letter which is being sent by HMRC following Spotlight 63. This communication sheds light on the potential fallout from the tax planning schemes orchestrated by Less Tax For Landlords (LT4L) and other promoters.
To see this, you can access the article containing the posted letter on the CIOT website: HMRC One to Many letters concerning ‘Spotlight 63’ LLP property tax planning
Elysium Law have been approached by numerous victims of this particular mess and are looking at bringing claims in professional negligence, amongst other causes of action, against the perpetrators. Note, there are in fact a few providers presently in our sights.
One issue that we raised with the professional advisors with whom we work is the policy HMRC are adopting in relation to the recovery of the many specific tax liabilities this scheme will cause.
Following these discussions, we’ve put together this short practical guide for those affected.
Exit
Exiting a tax planning scheme such as those implemented by LT4L demands careful consideration and strategic planning, especially in the aftermath of HMRC’s Spotlight 63.
Reassessing the Declaration of Trust
The first crucial step in the exit strategy involves evaluating the effectiveness of the declaration of trust over the beneficial ownership of properties within the LLP. If deemed necessary, a change may be required to shift the beneficial interest back to the individual(s). However, it is essential to note that there are significant considerations in this regard, which we will address shortly.
Income Declaration and Section 24 Implications
Once the beneficial ownership is realigned, landlords must declare the income and expenses on the properties as they did before. This reinstatement to individual ownership brings Section 24 of the Finance Act 2015 into focus, particularly impacting the calculation of taxable profits for those with mortgages.
Liquidation of the LLP and Limited Company
In certain scenarios, the LLP and Limited Company member may need to be liquidated, but exercising caution is paramount. This step should only be taken post-settlement to avoid potential complications.
Potential Pitfalls of the ‘Transfer Back’
One of the critical issues in the ‘transfer back’ process involves the change in the corporate member’s entitlement to profits. The looming question is whether HMRC would perceive this transfer as triggering SDLT or CGT charges. While we remain hopeful that it wouldn’t, seeking professional advice before taking any action is essential. Waiting for HMRC’s confirmation or agreement on any arguments presented is equally crucial.
Filing Returns: Exercise Caution and Transparency
For those compelled to file returns before HMRC confirms their stance, it is advised to base your position on professional advice. Full transparency in filing, accompanied by a clear rationale for the chosen position, is vital. Acknowledge the possibility of amendments and be prepared to provide evidence if HMRC disagrees, as filing without proper advice poses the risk of penalties and additional taxes.
Settlement
Mixed Membership and Reallocation
In addressing the mixed membership issue, it is anticipated that HMRC may seek to reallocate profits back to individual members. Moreover, there’s a possibility that HMRC might go a step further and consider ignoring the LLP structure entirely, leading to the computation of tax on the individual(s) based on a ‘normal’ basis.
Corporate Income Tax Offset in Settlement
For corporates that have previously paid income tax on profits, there is a potential avenue to offset or include this in an overpayment claim. This can effectively reduce the ‘cash’ cost of settlement, subject to time limits. Similarly, income tax paid by individuals on dividends from the corporate may be repayable, further alleviating the financial impact of settlement.
Inheritance Tax Implications
While we hope that no participants in these arrangements have passed away, considerations must be made. If Business Property Relief has been claimed for Inheritance Tax (IHT), and it is deemed ineffective, HMRC would expect necessary amendments.
CGT and SDLT Liabilities
The transaction and reallocation of profits may have triggered liabilities in terms of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). HMRC’s perception of the effectiveness of these events will determine the course of settlement. There’s a possibility (albeit a significant one) that HMRC may choose to ignore these issues. If not, computation and payment of SDLT and CGT become necessary, requiring careful consideration of available reliefs.
HMRC Registration and Policy Pause
While HMRC advises victims of this scheme to register, responsible professionals should encourage compliance. However, we recommend pausing a moment. As of now, HMRC has not disclosed its policy on these matters, making it crucial to stay informed and navigate the registration process with a clear understanding of potential implications.
Next Steps
In the initial phase, Elysium Law strongly advises seeking assistance from a professional adviser. Rushing into decisions without expert guidance may inadvertently lead to the creation of further tax liabilities. A professional adviser can provide invaluable insights, helping you make informed choices tailored to your unique circumstances.
It is highly likely that discussions with HMRC will be necessary to navigate the complexities of settlement and exit. Achieving a clear understanding of the precise terms for both settlement and exit is crucial. This ensures that you can leverage the benefit of any tax already paid, contributing to a smoother resolution of the situation.
Should you find yourself impacted by the aftermath of LT4L and the tax planning issues discussed in this article, Elysium Law is here to offer guidance and assistance. We recognise the complexity of the situation and the potential legal challenges involved, and our team stands ready to advise. Contact us today for advice on your personal circumstances.