{"id":9947,"date":"2023-09-13T07:45:00","date_gmt":"2023-09-13T06:45:00","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=9947"},"modified":"2024-01-22T21:05:27","modified_gmt":"2024-01-22T21:05:27","slug":"property118","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/09\/13\/property118\/","title":{"rendered":"Property118: a tax avoidance scheme for buy-to-let landlords that defaults their mortgage and increases their tax bill"},"content":{"rendered":"\n

Property118<\/a> is an unregulated adviser which works in a “joint venture” with a barristers chambers called Cotswold Barristers<\/a>. They promote a tax avoidance scheme aimed at buy-to-let landlords. But nobody involved appears to have any tax qualifications and in our view the scheme fails spectacularly.<\/em><\/strong><\/p>\n\n\n\n

This report explains the scheme, and explains why in our view, and that of the mortgage lenders’ industry body,<\/em><\/strong> it is likely to default the landlord’s mortgage. We also set out a detailed analysis of the serious tax problems with the structure. We are going into more technical detail than usual given the widespread promotion of this scheme in the market. Anyone who has entered into these arrangements should seek independent advice.<\/em><\/strong><\/p>\n\n\n\n

UPDATE: 16 September.<\/strong> Property118 have responded to this report<\/a>. Despite having two months notice of our findings, their response contains no response to any of the points we’ve made, just assertions that their structure is fully compliant, and that HMRC and lenders have never challenged it. As we note below, we doubt the structure has ever been properly disclosed to HMRC or lenders. Now HMRC and lenders is aware of the structure we expect challenges over the coming months and years.<\/p>\n\n\n\n

UPDATE: 22 September. <\/strong>We’ve a further report <\/a>on another aspect of Property118’s planning.<\/p>\n\n\n\n

UPDATE: 5 October.<\/strong> See also our report on Less Tax for Landlords<\/a>. A different scheme, but with some commonalities; in many senses an even worse scheme than Property118’s.<\/p>\n\n\n\n

UPDATE: 24 October. <\/strong>Mark Smith of Cotswold Barristers published<\/a> a response on the s162 point, but one which does not address the key problem with the structure. We’ve updated the text below.<\/p>\n\n\n\n

UPDATE: 9 November. <\/strong>The analysis below is of the structure Property118 intended to implement. Our review of their actual documentation reveals several critical implementation failings which means the actual position of their clients is likely significantly different, and significantly worse. We analyse this here.<\/a> This means that much of what follows below is likely academic.<\/p>\n\n\n

The sales pitch<\/h2>\n\n\n

Most buy-to-let landlords hold their properties personally. So they pay income tax at 40% or 45% on the rental income. Until 2017, their mortgage interest was deductible, meaning a result something like this:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

George Osborne changed that<\/a>, replacing interest relief with a 20% credit. That makes a big difference:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

Many landlords view this as unfair, because the \u00a32,400 tax is more than their \u00a32,000 net income (although the purpose of the rules was expressly to discourage buy-to-let mortgages, so this rather punitive outcome is actually the point).<\/p>\n\n\n\n

The obvious move is to hold the properties in a company. Corporation tax is less – below 25%, for a small company1<\/a><\/sup>The rate is 19% for profits under \u00a350,000, with a “catch-up rate” of 26.5% on profits up to \u00a3250,000, so that the overall effective rate smoothly transitions into the full rate of 25%<\/span> and companies get full tax relief for mortgage interest.2<\/a><\/sup>Obviously you will want to get the money out at some point, but being able to defer and roll up low-taxed income is valuable in itself<\/span><\/p>\n\n\n\n

But it’s not easy for a buy-to-let landlord to move their properties into a company. There can be capital gains tax and stamp duty land tax (SDLT) on the way in. And – most seriously – the mortgage lender won’t allow the existing individual mortgage to move to a company. You could get a new mortgage, but mortgages for companies are significantly more expensive than buy-to-let mortgages. 3<\/a><\/sup>Because a landlord can walk away from a company in a way that they cannot walk away from a personal mortgage<\/span> <\/p>\n\n\n\n

Advisers therefore frequently caution clients that the increased interest cost of moving properties to a company can easily exceed the tax saving. It’s often a mistake to be over-focused on tax savings.<\/p>\n\n\n

The Property118 solution<\/h2>\n\n\n

Wouldn’t it be wonderful if you had all the tax benefits of moving to a company, but could keep your existing bargain-price mortgage?<\/p>\n\n\n\n

Property118 say you can, with what they call the Substantial Incorporation Structure:<\/p>\n\n\n\n