The Secret Landlord The tax tricks to avoid

HMRC warns that the hybrid business model risks costing landlords more in the end

Desperation makes people do strange things. I know this because it is how I found myself calling a random company I’d been told about that could “save me tax”.

The idea, as far as I understood it, was a “rent-to-rent” model. The company would rent a property from me for the long term (three to five years) and it would then rent that property on to a care provider.

Because the end user was a commercial enterprise, the tax treatment would be different. Apparently it was something like the tax treatment of holiday lettings (as a trade, not an investment) and, on top of this, the modifications (which the provider would pay for) would enable me to claim capital allowances of up to £ 50,000. “It’s a little-known tax loophole,” I was told.

Confused by the offering, I jotted down everything in an email to my accountant and asked if they knew anything about it. The response was: you cannot make a capital allowances claim when somebody else pays for the work. It would have to be you who makes and pays for the modifications and you should be clear on your return on investment and what those modifications would mean for your business. The email ended with: “Don’t let the tax tail wag the commercial dog.”

I smiled at this oft- quoted advice. Over the years I’ve seen a number of schemes designed to tempt landlords to change their business structure in an attempt to “save tax”. I won’t deny I’ve looked at most of them. My tax bill is way more than it should be because of the inequitable way landlords are taxed. I can well understand the pain of those property investors who once had a viable business model and have now ended up on the skids thanks to the Government’s attempts to get rid of private landlords.

It’s this pain, desperation and feeling of unfairness that fuel the number of landlords searching for that “loophole” that some clever tax nerd has come up with. Plenty of companies have come to the fore with myriad ideas from “hybrid business models”, “substantial incorporation structures” and “trusts” to creating “director loans”. Most offer some form of “guarantee” that HMRC has not chucked the idea out, that they have taken legal advice and that, if push comes to shove, they have insurance.

Not one of these schemes or ideas that I’ve passed by my accountants has ever passed their stress tests. I’ve never done anything more than be vanilla with my taxes. But that is not to say some people weren’t tempted, and I get that. It’s also hard to fathom who may be cowboys when some of these companies appear at trusted property shows and advertise via official landlord bodies. But the murky goings-on have been exposed by Dan Neidle, the tax lawyer who founded Tax Policy Associates, a notfor-profit organisation that advises policymakers and journalists on tax policy.

His investigations are worth reading. They are long and detailed, if way too complicated for me to cover here. The bottom line is: you cannot escape the removal of tax relief on buy-to-let mortgage interest unless you incorporate as a company, reduce borrowings or sell.

HMRC has published guidance to dispel any confusion. The taxman said: “HMRC is aware of a scheme being marketed as a tax planning option available to individual property landlords to structure their property business. 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 tax payable on profits generated by the property business; reduce capital gains tax payable when properties are sold; and reduce inheritance tax on death.

“HMRC’s view is that this scheme does not work. People who use these arrangements may have to pay more than the tax they tried to avoid as well as paying interest, penalties and high fees for using such schemes.”

The Secret Landlord is by an anonymous buy-to-let investor. Write to her at

secretlandlord@telegraph.co.uk