HMRC have published Tax Avoidance Spotlight 63a: 'Property business arrangements involving hybrid partnerships and indemnities'.
The spotlight, published in April 2026, follows the publication of the similar Spotlight 63 in October 2023. The primary difference between the two structures is the inclusion and use of indemnities for tax avoidance in Spotlight 63a.
The arrangements covered by Spotlight 63a, sometimes referred to as a hybrid business model, claim to:
- Bypass Mortgage interest relief restrictions, allowing increased deductions for mortgage interest.
- Reduce the amount of tax payable on profits from property businesses.
The arrangements are typically set up as follows:
- A landlord or a member of their family creates a limited company. They then set up a Limited Liability Partnership (LLP) with the limited company as a corporate member.
- The landlord transfers their beneficial interests in the properties to the LLP.
- Indemnities are put in place so the corporate member becomes responsible for the landlord’s outstanding mortgage liabilities.
- 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.
- The LLP profits are allocated to members in a discretionary way, with profits going to the corporate member to meet indemnity obligations.
- The corporate member claims a deduction for finance costs (such as mortgage interest) relating to the properties.
Landlords are told that the arrangements result in less tax being payable as:
- 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 a 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 is that the scheme does not work, as the following legislation will apply:
- The Mixed-member partnership legislation at s.850C and s.850D of the Income Tax (Trading and Other Income) Act 2005.
- This reallocates excess profits allocated to the corporate member to the landlords, so they do not count as a genuine capital contribution by the corporate member.
- S.809AAZA of the Income Tax Act 2007 (the Disposal of income streams through partnerships rules).
- This 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
- S.59A of the Taxation of Chargeable Gains Act 1992.
- This 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.
- This applies to the transfer of properties and changes in entitlement to LLP profits, meaning that 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. Penalties apply for late submission.
Anyone involved in such a scheme is advised to contact HMRC to discuss how they can settle their position by emailing:
The spotlight reminds promoters of the scheme that they must comply with the Disclosure of Tax Avoidance Scheme (DOTAS) rules, with failure to do so attracting penalties of up to £1 million and the risk of the publication of their details.
Useful guides on this topic
Spotlight 63: Property business arrangements involving hybrid partnerships
HMRC have published, and in May 2025 updated, Tax Avoidance Spotlight 63: ‘Property business arrangements involving hybrid partnerships.’
DOTAS: Disclosure Of Tax Avoidance Schemes
What are the Disclosure Of Tax Avoidance Schemes (DOTAS) rules? When should you disclose your use of a tax avoidance scheme? What are the consequences of non-disclosure? How are penalties calculated?
Penalties: DOTAS
What are the penalties for failure to disclose under the Disclosure of Tax Avoidance Schemes (DOTAS) regulations?
Transfer of assets and income streams through partnerships
What are rules for the transfer of assets and income streams through partnerships? When do they apply?
Mixed members: Partnerships with company members
What is a mixed-member partnership? How are the profits of a mixed-member partnership taxed? What tax adjustments are required? Are there any relieving provisions?
External link
Spotlight 63a: Property business arrangements involving hybrid partnerships and indemnities