Thread by @DanNeidle

Our new report: possibly the Worst Tax Avoidance Scheme Ever.

It's a scheme for buy-to-let landlords from an outfit called Property118.

The sales pitch: save £k in taxes. The likely reality: costs £££k in additional tax and defaults the mortgage.

A 🧵:

Here's the sales pitch.

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:

George Osborne changed that, scrapping interest relief. Landlords just get a 20% credit, which means much, much more tax:

The obvious move is to hold the properties in a company. Corporation tax is less - below 25%, for a small company. And - critically - you still get full tax relief for interest.

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 landlord's existing 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. (Because higher risk for the lender)

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?

Property118 say you can, with what they call the "Substantial Incorporation Structure".

The idea is that the landlord establishes a company, and contracts to sell his properties to the company. But he doesn't "complete" the contract.

The landlord remains the legal owner of the properties. The company becomes the beneficial owner under a trust.

The claim is that the company now owns the property for tax purposes and - because it's a company - gets tax relief on its interest.

The landlord still has the mortgage, and is still making payments to the bank. And - hush, hush - never tells the bank about the arrangement.

So, as if by magic, the mortgage remains in place, but the landlord saves a pile of tax:

There are just a few tiny problems with this.

We set them out in detail in our report, linked at the end of this thread.

A quick summary (well, not that quick...):

First, and most dramatically, the scheme defaults the landlord’s mortgage.

Mortgage terms usually require consent for any sale, including sale of the beneficial interest. We reviewed sample T&Cs, and spoke to industry experts. The position is clear.

But consent isn't obtained.

The trust also likely invalidates the buildings insurance (because the landlord no longer has an "insurable interest").

Which triggers another default of the mortgage (as almost all mortgages require valid buildings insurance to be maintained)

It's hard to imagine a worse outcome for the landlord than defaulting their mortgage.

It's a serious accusation, and so we spoke to UK Finance, the mortgage lenders’ industry body. They agreed:

It gets worse.

The whole concept is flawed, because Property118 have forgotten that the landlord is still there, still paying £8k to the bank, but now receiving £8k of new income from the company.

That income? It's taxable - with no deduction for the interest.

A tax disaster.

(There are other possibilities for how this plays out, set out in our report. Some worse than this, some better (capital treatment for the indemnity payments probably the best outcome). But all worse than if the taxpayer had steered clear of the structure)

It gets worse.

If you sell property to a company, there's capital gains tax. Property118 say incorporation relief applies. But the rules require that "the whole of the assets of the business" move to the company. And that's not happening - legal title remains with the landlord

It gets worse.

There's usually stamp duty if you sell a property to a company. Property118 have a *fascinating* argument that, where a husband and wife were joint landlords, it was a partnership all along. They retrospectively file partnership tax returns...

... and claim SDLT "partnership relief"

It's quite a stretch. Marriages and partnerships are very different things (I've tried both. Marriage is more fun. Partnership had better cookies).

The argument recently went before a judge, and the results weren't pretty.

So the brilliant tax-saving structure in fact defaults the mortgage, triggers a capital gains and stamp duty hit, and results in much more tax paid than is saved.

Tax avoidance perfection.

And for this, Property118 often charge fees of £40k, to landlords earning less than £100k/year.

They're set up to get referrals from other websites, paying £2,000 for a click that results in new business - meaning that they're widely promoted by other firms.

For £40,000 you could expect to instruct a well-known accounting or law firm, staffed by qualified tax lawyers/accountants.

But Property118 have no employees with tax qualifications. They're entirely unregulated.

I had a very confusing exchange of emails with Mark Alexander, head of Property118, in which he didn't appear to have even heard of the two main tax qualifications: ATT and CTA.

They rely heavily on advice from "Cotswold Barristers", with which they have a very unusual form of joint venture

(The text below is guaranteed to confuse all the barristers who read it)

The chambers head, Mark Smith, is a generalist whose practice ranges from business law, to tax, to criminal defence work, to private prosecutions (including one where he was suspended by the Bar Standards Board for negligence and "failing to act with reasonable competence").

Barristers chambers usually list their members - the members being the whole point of the chambers. Cotswold Barristers is unusual in not doing this. It did at one point - and included in its team a fake barrister who was jailed for conning a dying woman out of her savings

There is no suggestion that Cotswold Barristers was aware of his actions, but Cotswold Barristers does appear to have been responsible for listing him as part of its team.

It is common practice to give the subject of a report or investigation 24 hours to respond. The response we received from Property118 was unusual in several respects. We've included all of it our report.

The initial response was a request from the CEO of Cotswold Barristers to join a recorded Zoom call: "Why won’t you come on video and ask your questions? The public deserve to make their own assessment".

Cotswold Barristers responded, but leant very heavily on the claim that their approach has been accepted by HMRC and other accounting firms. We are sceptical that full disclosure was ever made to HMRC.

We think this scheme has been kept under the radar. Never properly disclosed to lenders. Never properly disclosed to HMRC. It's now out in the open, and that's likely to end badly for Property118.

I think they sense this. Their final response to me was a vague legal threat: "Your continued blackmail is noted and our response to any damages caused to our businesses by your future actions will be dealt with accordingly."

Suffice to say, I would not recommend anyone use these outfits for any tax or legal advice. If you have used them, please urgently seek independent advice from a properly qualified professional (e.g. solicitor or accountant with ATT or CTA qualifications)

Our report is here. It's unusually detailed because we're aware Property118 have a large presence on the internet, and many accountants, business advisers and landlords come across their structure. It's important people are aware how flawed it is.

taxpolicy.org.uk/2023/09/13/pro…

Our report isn't just my opinion. It reflects the views of numerous leading legal and tax professionals. Thanks to everyone who helped, including @UKFtweets, @PeteTaxMiller and @SeanGRandall - as well as all the accountants and other advisers who alerted us to this scheme.

For more updates on tax policy and tax avoidance schemes, you can subscribe here: taxpolicy.org.uk/subscribe/

@Eastreadingcom bearing in mind you may get CGT and probably get SDLT on the way into the company. Also risk a future change of law knackering interest relief for company landlords.

Lots of good advisers around to help with this.