Hybrid LLPs and my thoughts on HMRC’s Spotlight 63A

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Hybrid LLPs and my thoughts on HMRC’s Spotlight 63A

This is my own opinion piece, reflecting my reading of the law and my own thoughts on how HMRC and the tax tribunals should approach the Hybrid LLP transactions described in HMRC Spotlight 63A. It is not advice, and other commentators will disagree with me, but that is the nature of tax.

What follows is intended to do three things for landlords:

• Explain, in plain English, what the issue actually is
• Cut through the conflation of rules and commentary that has developed
• Set out a legally grounded view of where the tax analysis should land

I also make this important distinction at the outset. Property118 raised concerns about Hybrid LLP arrangements as far back as 2017 and has never recommended them. This situation is entirely separate from the case we are advancing before the Tax Tribunal on HMRC’s interpretation of s162 incorporation relief and refinancing. Conflating the two does not help anyone.

What is the Hybrid LLP issue in simple terms?

Many landlords have become victims of structures involving the formation of an LLP in which one or more of the members is a Limited Company, with arrangements under which the company member receives a share of rental profits that it isn’t entitled to receive.

The main promoter and implementer of the scheme suggests that the company contributed “capital” by indemnifying mortgage debt, and that is where the technical narrative begins. It is also where, in my opinion, it goes wrong, because if you strip the structure back to its economic reality, the key factor is that what actually changed (incorrectly, in my opinion, for reasons I will come to) was the allocation of income.  On that basis, the allocation of income should be the starting point for any proper legal analysis.

Sadly, the scheme was heavily promoted by the NRLA, which added credibility to the arrangements, and which has left several of it’s members now caught up in a nightmare scenario and feeling duped. The NRLA denies being a ‘Promoter’ or endorsing the scheme, but the evidence I’ve reviewed contradicts that position entirely.

What exactly is the true purpose of an indemnity?

The creation of an indemnity is not a shift of capital at all. The purpose of an indemnity over liabilities is referred to in HMRC’s manual CG65745 and also in Extra Statutory Concession D32, but for a completely different purpose altogether. Liabilities are external debts an organization owes to third parties (creditors, banks, mortgage lenders) that must be repaid, such as loans or accounts payable. Capital is the internal, residual value invested by owners, or gains made on those investments, representing the owners stake in assets after liabilities are paid. It is seemingly a misunderstanding of this terminology that is a large part of why landlords who participated in Hybrid LLP scheme are in so much difficulty.

Why the “indemnity equals capital” argument does not hold

My thoughts are broadly aligned with HMRC on this point.

The Hybrid LLP structure relied on the idea that a company introduces capital by indemnifying borrowing. I do not accept that, nor does HMRC.

An indemnity is a contingent obligation, not cash, not an asset transferred, and not something that increases the net asset position of the LLP. Nor does it reduce liabilities or create new assets within the business. In ordinary commercial terms, and in accounting terms, it is not capital. The importance of this point is that the allocation of profit to the company was justified by reference to that supposed capital contribution. If that foundation falls away, the structure becomes impossible to defend.

What actually happened?

Once you remove the language and labels, the position becomes clearer.

• The rental income continues to arise from properties owned and controlled by individual members of the LLP
• The economic exposure to those properties remains proportional to those individuals
• A portion of that income is allocated to a company

In other words, income has been diverted without a corresponding transfer of the value that generates it. That is not a niche or obscure issue in tax law. It is something Parliament has already legislated for.

The evidence I’ve studied, which includes the full accounts of several landlords who were duped into the Hybrid LLP scheme, is that equity in their properties was consistently reflected in their personal capital account balances. I’ve seen no evidence in later accounts to suggest that position ever changed, which leads me to conclude that there was never any form of capital shifting beyond the transfer of beneficial ownership from individuals to their own capital accounts, which should be treated as tax-transparent in any event. If capital shifting had occurred, other forms of tax might have applied, but I have seen no evidence of that having happened.

The correct legal lens, in my view

The most natural fit, based on the facts above, is Transfer of Income Streams legislation 2009 schedule 25.

In simple terms, that legislation exists to deal with situations where income is separated from economic beneficial ownership of the asset or activity that produces it and the person who retains the underlying value seeks to shift the tax elsewhere. The reality is more straightforward: tax follows the underlying economic reality, not the contractual allocation of income.

If the economic beneficial ownership of the whole business had been moved to the company member of the LLP, then taxation would follow it, but that is not what Hybrid LLP’s did. Furthermore, in that scenario, there would have been no purpose for the LLP to exist at all.

Applied here, the above leads to a “look through” approach being the most logical outcome, where the individuals who retain the economic interest should be the ones taxed on the income. The diversion of income to a company should be ignored for tax purposes. This is not a novel interpretation, it is precisely what the legislation was designed to achieve.

What does correction look like in practice?

If HMRC, or ultimately a Tribunal, adopt my opinion, the outcome should be relatively clear.

• Rental income is taxed on the individual members
• Section 24 finance cost restrictions apply at the individual level
• The corporate member’s allocation is disregarded for income tax purposes

This is a correction, not a recharacterisation into something entirely different. It brings the tax position back into line with the underlying facts.

Why I do not agree with some of the wider commentary

A number of commentators have expanded the analysis into areas that, in my view, do not naturally arise from the facts. For the landlords affected, that is where confusion and massive legal fees being paid for advisers to argue their opinions, have all crept in. Forgive me for this skeptical rhetorical question but; was this fearmongering designed to charge landlord victims of the Hybrid LLP scheme big fees to fund the professional curiosity of ‘ambulance chaser’ firms?

Stamp Duty and CGT can arise on profit share allocation where capital shifting has occurred. However, in my opinion, that’s not the case here, and if it was, then I don’t think HMRC can have it both ways, i.e. to disallow the transfer of income on the grounds that it should never have happened, AND, on the other hand, to charge both CGT and SDLT as if it did happen. In my opinion, the only clear CGT exposure is where properties have been sold and capital gains have not been declared. I could be wrong, and that’s why I expect other commentators to disagree with me, but I suspect that’s where the Tax Tribunal decisions will land. Please remember, these are just my opinions, they are not advice!

Why multiple legal routes may still lead to the same place

It is important to recognise that HMRC are unlikely to rely on a single provision to litigate their case.

They may also look to mixed member partnership rules and general anti-avoidance principles. Those routes differ in their technical construction, but they often converge on the same practical outcome, i.e. that income is taxed on the individuals who truly earn it. That convergence strengthens, rather than weakens, my analysis set out above.

Why this is fundamentally different from Section 162 incorporation

Under Section 162 incorporation relief, the legal and economic position is very different.

• The whole business is transferred to a company
• The beneficial ownership of the assets moves
• The company becomes the entity that earns the income going forward

That is a genuine commercial transaction because beneficial ownership moves fully to the company. Tax follows that movement.

Where Property118 stands

I want to be absolutely clear on three points.

First, Property118 has never recommended these hybrid LLP structures. We raised concerns about them as far back as 2017, precisely because of the issues now being debated.

Second, my position here is grounded in what I believe the law requires. I am not defending the Hybrid LLP structure. I am explaining how it should be analysed and how I beleive the tax position should be corrected.

Third, this is a completely separate issue from the case Property118 are currently advancing before the Tax Tribunal in relation to HMRC’s current interpetations of s162 incorporation relief, ESC D32 and BIM45700. Those issues relate to incorporation and refinancing, where real business transfers and genuine economic changes occured, whereas the hybrid LLP arrangements described in Spotlight 63A are completely different. Conflating the two risks misunderstanding both.

Why this matters so much for landlord victims of the Hybrid LLP scheme

For landlords caught up in Hybrid LLP arrangements, the key concern is uncertainty. What are the risks? What should be corrected? How serious is the position? How much tax do they actually owe?

My view is that clarity should come from focusing on first principles.

• No meaningful capital was introduced to the corporate member of the LLP
• No real value was transferred to the company
• Income was reallocated away from those who owned the assets that generated it

Seen in that light, the issue becomes one of income tax, not a cascade of unrelated taxes.

Any landlords who have not already exited the scheme and made arrangements with HMRC to pay the extra income tax due are putting themselves in jeopardy in my opinion. Unfortunately, there seem to be many such landlords who are coninuing to bury their heads in the sand, and I don’t think it will be too long now before they find themseves in a position when they are dealing with the ruthlessness of HMRC’s collections department. They probably can’t refinance, so selling properties now seems to be their only option, unless they have sufficient cash funds to pay their tax debts from other sources.

A grounded conclusion

Tax law can become complex very quickly. Structures, commentary and competing interpretations can obscure what is actually happening, but when we return to fundamentals, the picture becomes clearer. If income has been diverted without transferring the underlying value, the tax system already has the tools to deal with that. The Transfer of Income Streams legislation is the most direct expression of that principle, supported by other rules that reach similar outcomes.

That is why I take the views expressed above, not because it is convenient, but because it aligns with how the law is intended to operate.

Final thought

There will be further debate on this. There will be differing opinions, and likely continued commentary that stretches the analysis in different directions, but my position is deliberately grounded.

Focus on what moved. Focus on who retains the economic interest. Apply the law accordingly.

In many cases, that leads to a straightforward conclusion: the income should have been taxed on the individuals in the first place.

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Landlords sitting on significant equity, but much of it remains unused

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Property118

Landlords sitting on significant equity, but much of it remains unused

A quieter theme emerging from the latest landlord data is not about borrowing, but about what is not being done with existing equity. According to the Property118 Landlord Sentiment Survey Q1 2026, a large proportion of landlords now operate with low loan-to-value ratios or no borrowing at all, indicating substantial levels of equity sitting within portfolios.

Based on 2,380 completed responses, the majority of landlords report loan-to-value ratios below 50%, with many holding properties outright. You can explore the full dataset here.

The implication is clear: significant capital exists within the sector, but much of it is not actively deployed.

Equity without direction

For many landlords, equity has built up gradually over time through capital growth and mortgage repayment. This has created a position of financial strength, but not always a clear plan for what that capital is intended to achieve. In some cases, it simply remains within the properties themselves, without being actively utilised.

This is not necessarily a problem, but it does raise an important question:

If the equity is not being used to support growth, income or wider financial planning, what role is it serving?

From growth to preservation

The shift towards lower leverage suggests a broader change in mindset. Earlier stages of portfolio building often involve higher borrowing levels to accelerate growth. Over time, as portfolios mature, the focus tends to move towards consolidation and risk reduction.

The survey findings reflect this transition.

Many landlords are no longer looking to expand aggressively. Instead, they are holding substantial equity while reassessing their long-term objectives.

Opportunity or inefficiency?

Unused equity can be viewed in two ways. On one hand, it provides security. Lower borrowing reduces financial risk and creates resilience against market fluctuations. On the other, it may represent an opportunity cost.

Capital tied up in property is not easily accessible, and if it is not being actively deployed, it may not be contributing fully to income generation or broader financial planning.

This is where the distinction between holding assets and actively managing them becomes more relevant.

A factor in changing behaviour

The presence of significant equity also influences how landlords respond to current market conditions. As highlighted elsewhere in the Property118 dataset, many landlords are planning to reduce their portfolios or exit entirely. When equity levels are high, these decisions become easier to implement. Selling a property with low or no debt is a straightforward way to release capital, particularly if there is no immediate need to refinance or restructure, but is that the best option to choose?

A turning point in how portfolios are used

The data suggests that many landlords are approaching a turning point. Having built substantial equity over time, the focus is shifting from accumulation to utilisation. The question is no longer how to build the portfolio, but what to do with what has already been created.

For now, one conclusion stands out: a significant proportion of landlord wealth is tied up in property, but without a clear strategy, that equity risks remaining passive rather than productive.

A conversation worth having?

If you are weighing up your own strategy, whether that’s to sell, expand, or restructure to improve profitibility, it is worth having a discussion with a Property118 consultant to take a closer look at how your portfolio is structured as a whole now, and to forecast the outcomes based on multiple scenario’s.

These conversations are typically most useful for landlords with established portfolios and relatively modest borrowing who are beginning to reflect on how their assets could work more effectively in the years ahead.

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