Hybrid Partnership and Indemnity Tax Avoidance Scheme Warning

Guidance

Property business arrangements involving hybrid partnerships and indemnities (Spotlight 63a)

Find out about a scheme used by individual landlords to avoid paying tax on their property income.

From: HM Revenue & Customs Published 22 April 2026 Get emails about this page Print this page HMRC is aware of a tax scheme being promoted to landlords as a way to structure their property businesses and reduce their tax bills. Sometimes referred to as a hybrid business model, the arrangement claims to:

• bypass mortgage interest relief restrictions, allowing increased deductions for mortgage interest
• reduce the amount of tax payable on profits from their property business HMRC’s view is that this scheme does not work. Landlords who use these arrangements could end up paying more tax than they tried to avoid, along with interest, penalties and high fees.

How the arrangements claim to work

The arrangements are intended to help landlords avoid tax by transferring their properties to a limited liability partnership (LLP) which has a corporate member. Profits are then distributed among members of the LLP at their discretion.

The arrangement is typically set up in the following way.

1. A landlord or a member of their family creates a limited company. They then set up an LLP with the limited company as a corporate member.
2. The landlord transfers their beneficial interests in the properties to the LLP.
3. Indemnities are put in place so that the corporate member becomes responsible for the landlords’ outstanding mortgage liabilities.
4. Because of these indemnities, the corporate member is considered to have made a capital contribution to the LLP equal to the value of the mortgages.
5. The LLP profits are allocated to members in a discretionary way with profits going to the corporate member to meet indemnity obligations.
6. The corporate member claims a deduction for finance costs (such as mortgage interest) relating to the properties. Landlords are told that this arrangement will reduce their tax because:

• transferring properties to the LLP does not trigger an immediate tax charge
• the corporate member is said to be entitled to a notional return on its ‘capital contribution’, meaning profits do not need to be reallocated under the mixed member partnership rules
• the corporate member can claim full deduction for its share of finance costs as restrictions do not apply
• the corporate member pays Corporation Tax on its net profit share — this is instead of paying the higher or additional Income Tax rates which would normally apply to landlords if profits had been allocated to them

HMRC’s view of the arrangements

HMRC’s view is that this scheme does not work because:

• mixed member partnership legislation — sections 850C and 850D of the Income Tax (Trading and Other Income) Act 2005 — means excess profits allocated to the corporate member are reallocated to the landlords, so do not count as a genuine capital contribution by the corporate member
• anti-avoidance legislation — specifically section 809AAZA of the Income Tax Act 2007 — applies so that even if a landlord transfers their rental income to another person or structure, that income is treated as the landlord’s own income
• section 59A of the Taxation of Chargeable Gains Act 1992 means that, for Capital Gains Tax purposes, where an LLP carries on a trade or business with a view to profit, it is treated as transparent — meaning landlords continue to own a share of the properties and the base cost of the properties is unchanged
• paragraphs 10 and 14 of schedule 15 of the Finance Act 2003 apply to the transfer of properties and changes in entitlement to LLP profits — meaning Stamp Duty Land Tax (SDLT) will apply to these transfers and when profit shares change
• LLPs with company members holding beneficial interests in UK residential property worth more than £500,000 are subject to the Annual Tax on Enveloped Dwellings (ATED) — relief may be available but only through submitting an ATED return and penalties apply for late submission

What to do if you’re using this arrangement

If you think you’re already involved in this arrangement and want to get out, HMRC can help. HMRC offers a range of support to get you back on track or avoid being caught out in the first place.

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 eligible for.

If you’re using this or similar schemes or arrangements, HMRC strongly advises you to get in touch and settle your tax affairs. You can do this by emailing spotlight63@hmrc.gov.uk and we will:

• tell you what further information we require

• provide additional support to reach a resolution
  Anyone concerned about the schemes they are currently using should also consider:

• getting independent professional tax advice

• speaking to one of the tax charities such as TaxAid — you can find more information on the TaxAid website

What this means for promoters

Scheme promoters must comply with the disclosure of tax avoidance schemes (DOTAS) legislation making sure the schemes they are marketing are disclosed to HMRC.

Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within 5 days of the scheme being made available or implemented. The initial penalty is up to £600 a day.

If the penalty is calculated to be less than £1 million and this is not considered to be a sufficient deterrent, promoters may have to pay a penalty of up to £1 million.

HMRC can publish information about tax avoidance schemes we are aware of, and about the people involved in the supply and marketing of these schemes.

HMRC 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 schemes which are later defeated by HMRC
• use its powers under the promoters of tax avoidance schemes regime against those who continue to promote tax avoidance schemes

Report a scheme

You can contact HMRC to report a tax avoidance scheme or its promoter, using our online service — or by phone, if you cannot use the online form. You can do this anonymously without providing your personal details.

Updates to this page

Published 22 April 2026

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