Landlords Beware: HMRC Warns Against LLP Property Incorporation Scheme (Spotlight 69)

Landlords considering incorporation to optimise their tax position should proceed with caution—especially in light of HMRC’s latest warning, known as Spotlight 69. This official guidance highlights an aggressive tax avoidance scheme being marketed to landlords, involving the transfer of properties to a limited liability partnership (LLP), followed by liquidation, with the aim of avoiding capital gains tax (CGT), stamp duty land tax (SDLT) and other liabilities.

Unfortunately, HMRC has made it clear: the scheme doesn’t work. Worse still, anyone using it risks interest, penalties, and a full tax bill.

In this article, we explain what the scheme is, why HMRC is clamping down, and what landlords need to know before making any moves to incorporate their property business.

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🏚️ What is the LLP Property Scheme?

This tax avoidance scheme is specifically targeted at landlords—especially those who have owned residential properties for many years and are now facing hefty CGT bills if they try to incorporate or restructure.

🧠 How the Scheme is Supposed to Work:

1. A landlord owns a portfolio of rental properties—usually held personally.

2. The landlord forms a Limited Liability Partnership (LLP) and transfers the properties into the LLP at market value.

3. A short time later, the LLP is voluntarily liquidated.

4. The properties are then transferred to a limited company (often owned by the landlord or their family).

5. The claim is that no CGT arises on the transfer to the LLP, and again no CGT arises when the properties go from LLP to the company.

6. Proponents claim this allows the properties to land in the company’s hands without triggering CGT, SDLT, or IHT—and that Business Property Relief (BPR) can be claimed later on for IHT.

Sounds too good to be true? That’s because it is.

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❌ Why HMRC Says the Scheme Fails

HMRC’s Spotlight 69 confirms that these types of schemes will not achieve the promised tax savings and that participants may face interest, penalties, and additional taxes. The government has already passed new legislation (Finance Act 2025) to stop this behaviour in its tracks.

Here’s why the scheme doesn’t work, in HMRC’s view:

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1. Capital Gains Tax (CGT) Trap – New Rules Close the Loophole

Normally, no CGT arises when assets are transferred into an LLP, because the LLP is tax-transparent and the underlying ownership doesn’t change.

However, under new legislation (TCGA 1992, s.59AA), if:

• A member contributes assets to an LLP, and

• The LLP is then liquidated, and

• The assets are transferred to the original member or a connected person,

Then a CGT disposal is deemed to occur, and the member will be taxed as if they sold the property for market value.

This law applies to liquidations starting on or after 30 October 2024, meaning any scheme executed after that date is caught by the new rules.

➡️ Result: CGT is not avoided—it is triggered instead.

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2. Stamp Duty Land Tax (SDLT) Anti-Avoidance Applies

While partnerships can benefit from special SDLT rules, HMRC has stated that this scheme falls foul of anti-avoidance rules in FA 2003, s.75A.

These rules apply when there’s a series of transactions designed to artificially reduce the SDLT due—especially where:

• The end buyer is a company owned by the original seller, and

• The transaction was pre-arranged.

➡️ Result: SDLT is recalculated as if the landlord sold directly to the company, and full SDLT becomes due.

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3. Business Property Relief (BPR) – Likely Unavailable

Some promoters claim that, by incorporating into a company or LLP, the landlord’s business becomes eligible for Business Property Relief (BPR) for inheritance tax.

But there’s a catch.

Most residential rental businesses are classified by HMRC as “investment businesses”, not “trading businesses”.

And BPR does not apply to businesses that are mainly about holding investments.

➡️ Result: HMRC is very unlikely to accept a BPR claim for residential landlords—even if structured via an LLP or company.

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4. Annual Tax on Enveloped Dwellings (ATED) May Apply

If a company ends up holding residential property worth more than £500,000, then ATED charges may apply.

Even though there’s an exemption for property rental businesses, it is not automatic—a claim must be submitted each year.

Failure to do so results in penalties, even if no tax is due.

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5. General Anti-Abuse Rule (GAAR) Risk

HMRC has also said that it may consider invoking the General Anti-Abuse Rule (GAAR) in these types of cases.

If they do, and if the GAAR Advisory Panel agrees, HMRC can override the arrangements and issue a “counteraction notice” to assess the tax as if the scheme never existed.

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🧾 What If You’ve Already Used the Scheme?

If you’re a landlord who has used this scheme, or something similar, HMRC recommends taking action now.

You can contact HMRC via the dedicated email: spotlight69@hmrc.gov.uk

There’s also the option to settle your tax affairs voluntarily, which could help reduce penalties and interest.

We strongly recommend seeking professional advice before contacting HMRC directly. You may have options depending on your specific facts and timing.

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⚠️ Promoters of the Scheme Also at Risk

Promoters of tax avoidance schemes like this one must comply with DOTAS (Disclosure of Tax Avoidance Schemes) rules.

Failure to disclose the scheme can result in heavy penalties.

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✅ So, What Are the Legitimate Alternatives?

Landlords who want to move their property business into a company for commercial reasons (e.g. financing, succession planning, or tax relief) do have options—but they must follow the correct procedures.

Here are legitimate ways to go about it:

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1. Standard Incorporation with CGT Relief

If you’re running a genuine property business (with significant involvement), you may qualify for Incorporation Relief under TCGA 1992, s.162.

Conditions:

• You must transfer the whole business (not just some properties).

• All assets (except cash) are transferred into the company.

• The business must be a going concern.

• Consideration must be in the form of shares.

CGT is then deferred—not avoided entirely—but it can significantly reduce your immediate liability.

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2. Accept the CGT and Rebase

Some landlords prefer to sell the properties to their own company and pay CGT now, locking in the current tax rates.

The company will record the properties at market value, which may be advantageous for future planning.

If done correctly, this can also result in a director’s loan account, giving the landlord tax-free cash withdrawals when funds allow.

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3. Use of LLPs for Genuine Commercial Reasons

LLPs can still be useful in some circumstances—especially for succession planning or profit sharing—but not as a route to tax-free incorporation.

Always take advice before using complex structures.

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💡 Practical Tips for Landlords

• Don’t be tempted by schemes that seem “too good to be true”—they usually are.

• Document everything carefully. HMRC will look at your intention and substance.

• Seek advice early. Restructuring a property portfolio has long-term tax implications.

• Declare all transactions honestly. Disclosure can reduce penalties if HMRC later investigates.

• Stay up to date with new legislation—tax law is changing fast.

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👨‍💼 How Merranti Accounting Can Help

At Merranti Accounting, we help landlords and property investors:

• Assess whether incorporation is right for their business

• Calculate CGT, SDLT, and other tax implications

• Apply for legitimate tax reliefs (Incorporation Relief, PPR, etc.)

• Stay compliant with HMRC requirements

• Navigate letters, Spotlights, and disclosure procedures

We’ll work with your solicitor or tax adviser to ensure any structure is commercial, legal, and tax-efficient—without risking interest, penalties, or HMRC scrutiny.

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📌 Summary

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📞 Talk to Us

If you’re a landlord thinking about incorporating your property business—or if you’ve already used a scheme that HMRC is investigating—we’re here to help.