Beware Tax Planning Models Using LLP’s

Anyone that has heard me speak at events or had a consultation with me, has heard my concerns about the process that is touted of using the stepping stone of an LLP to become a Ltd to avoid the S24 tax effect, but also avoid CGT and SDLT in the process of transferring the property ownership.

I’ve felt like a lone voice on this for some time, but am pleased that with Mark Alexander’s permission, I could copy his post below. Also pleased to see that several offers have also recently spoken out about this.

In addition to the efficacy of the process, people seem to forget about the costs involved, and I’ve been delighted to see some of the most well-known mortgage brokers in the market warning against transferring title without mortgage company approval / remortgaging.

“If you are being advised to use an LLP as a stepping stone towards incorporation then you have good cause to be wary.

Of course there are many perfectly legitimate reasons to form a Limited Liability Partnership but that’s another story for another day.

However, there is a business model doing the rounds which relies on a piece of legislation created to deal with CGT on the liquidation of an LLP. This legislation is being abused by some tax planning schemes, and in my opinion it will not be long before HMRC comes down on it like a ton of bricks under their General Anti Abuse Rules in GAAR legislation.

When property is transferred into an LLP the transfers can be structured so that there is no SDLT or CGT payable. That is a fact and the people touting this abusive tax avoidance scheme know that and present Counsels opinion from top Barristers.

It is also a fact that if the partnership genuinely fails and is liquidated then the base costs for calculating CGT is the value of the properties at the point they were transferred into the LLP. Again, Counsels opinion of the legislation produced by advisers touting abusive tax avoidance schemes which are reliant on this piece of legislation will also confirm that fact.

At face value this is all great news because at the time the properties are transferred to the LLP they may well be worth considerably more than they cost to acquire. CGT avoided you may well happily think.

Errrm, sorry but NO!

If you enter into a LLP with the intention of liquidating it at a later date to avoid tax, that is without doubt abuse of the tax system and HMRC are going to be far from happy about it. My concern is that 1,000’s of LLP’s are currently being formed for exactly that purpose.

It doesn’t take a rocket scientist to see how HMRC will see straight though this.

If you form an LLP today, liquidate it after say one year and then a company, which has exactly the same owners miraculously decides to acquire the same assets it is pretty obvious what has occurred.

If this structure has been pitched to you, please consider very carefully what I have said above. You could find an unwelcome tax demand on your doormat for all the CGT you have avoided at some point in the weeks, months or even years after you have liquidated if you take up this scheme.

If you doubt what I am saying, ask your accountant to send all the papers to HMRC as attachments to an application for non-statutory clearance and see for yourself what reply you get and how quickly the scheme metamorphosis in some way. This is a scheme being touted by mainly by chancers, but shockingly, some very big accounting names have fallen for it and are recommending it to their clients too.”

If something looks wrong, smells wrong and feels wrong, then is fair to assume it’s the wrong thing to do.