Hybrid Partnership Structures for Landlords: Why HMRC's Spotlight Is Still On Them

Since Section 24 finished phasing in, we've had a version of the same conversation with landlords more times than we can count: someone has been offered a way round the mortgage interest restriction that doesn't involve incorporating the whole portfolio. It usually involves an LLP, a company as one of the members, and a profit split that looks nothing like who actually owns the properties. HMRC has now published two Spotlights naming this exact structure and saying, in as many words, that it doesn't work — and the second one exists because promoters kept selling it anyway.

What the structure actually looks like

The arrangement goes by a few names — hybrid partnership, hybrid business model — but the mechanics are consistent. Individual or joint landlords transfer their let properties into a limited liability partnership, and a company is brought in as a corporate member alongside them. The LLP then allocates its profits on a discretionary basis rather than in proportion to capital or effort, with a large share routed to the corporate member. Because that member is a company, its share is taxed at corporation tax rates and it can deduct mortgage interest in full, since Section 24's restriction to a basic-rate tax credit only ever applied to individuals, never to companies. The individual landlords keep a much smaller profit share, on which their own tax bill, and their exposure to the restriction, shrinks accordingly.

Sold as a package, the pitch goes further than income tax: promoters have also presented it as a way to reduce the Capital Gains Tax due when a property is eventually sold and the Inheritance Tax due on death, on the basis that beneficial entitlement has shifted into the corporate member. The appeal is obvious — none of the SDLT, mortgage refinancing or lender consent hurdles that come with a full incorporation of a rental portfolio, for a result that's pitched as similar.

Spotlight 63: HMRC's first warning

HMRC published Spotlight 63, "Property business arrangements involving hybrid partnerships," in October 2023. It's a warning notice rather than new legislation — HMRC uses Spotlights to flag arrangements it believes fail under rules that already exist, so that anyone using or considering one knows where HMRC stands before, not after, an enquiry lands. The Spotlight sets out the structure much as above and states plainly that HMRC's view is that it does not achieve the tax savings claimed, and that anyone using it may end up paying more than the tax they were trying to save, once interest, penalties and the promoter's fees are added up.

Spotlight 63a: the indemnity variant

Promoters didn't stop marketing the structure after 2023 — they adapted it. The variant HMRC addressed in Spotlight 63a has the corporate member take on responsibility for the mortgage liabilities attached to the properties, framed as an indemnity given to the individual landlords. That indemnity is then presented as a capital contribution the company has made to the partnership, which is used to justify allocating it a large share of the profit — the company is said to be carrying real financial risk, so it's entitled to a real financial return.

HMRC's response is that the indemnity isn't a genuine capital contribution at all. A company with little more than nominal share capital, indemnifying debt secured against property it has no real economic interest in, doesn't put anything at risk in substance, whatever the paperwork says. Once that foundation is treated as artificial, the justification for the profit allocation goes with it, and the structure is back to where Spotlight 63 already said it stood.

Why HMRC says it doesn't work: the mixed membership partnership rules

The legal mechanism HMRC leans on hardest is the mixed membership partnership regime at ITTOIA 2005 ss.850C to 850E, introduced by Finance Act 2014 specifically to stop partnerships shifting profit toward non-individual members for a tax advantage. A partnership counts as "mixed" wherever it has both individual and non-individual members — exactly the shape of an LLP with a corporate partner. The rules reallocate profit back to the individual where either of two conditions is met:

• Condition X — it's reasonable to suppose the corporate member's profit share includes amounts representing the individual's deferred profit, and that the individual's own profit share, and tax bill, is lower as a result than it would otherwise have been.
• Condition Y — it's reasonable to suppose the corporate member's profit share, or part of it, is attributable to the individual's power to enjoy that profit, and that the individual's own profit share and tax bill are lower as a result.

A profit split with no real commercial rationale beyond reducing the individuals' tax bill sits close to the centre of both conditions, and the burden falls on the taxpayer to show the rules don't apply — not a light burden to discharge where the corporate member's capital contribution is an indemnity rather than cash actually put at risk. Where the conditions are met, HMRC treats the excess share as the individual's own profit for tax purposes, taxed at their personal rate, with the mortgage interest restriction applied in full as though the LLP had never allocated a penny to the company.

What this means for landlords who've already signed up

Where the rules apply, the tax result is largely as though the structure never existed — profit reallocated to the individuals, the Section 24 restriction reapplied, and additional tax due for every open year, with interest running from the original due dates. Depending on how the arrangement was disclosed on the tax return and how it was marketed, inaccuracy penalties can also apply on top. None of that is offset against the promoter's fee already paid to set the LLP up, which is simply lost. HMRC's message in both Spotlights is aimed squarely at that outcome: unwinding a structure voluntarily and disclosing the correct position tends to land in a materially better place than waiting for an enquiry to reach the same conclusion.

None of this means every LLP with a corporate member is automatically a Spotlight 63 arrangement. A genuine trading or development partnership with a corporate partner, where the profit split reflects real capital contributed and real economic risk carried, is a different question entirely. The line HMRC is drawing is around portfolios of let property moved into a partnership purely to route profit toward a corporate member for a tax result that doesn't track any change in who actually owns, manages or risks capital on the properties.

Common mistakes

• Treating an HMRC Spotlight as a proposal open to negotiation rather than a stated position on how existing law already applies
• Assuming an indemnity arrangement fixes the profit-allocation problem the original structure had, rather than simply changing the form of the same argument
• Believing the CGT and IHT claims made for the structure stand independently of the income tax point, when all three rest on the same disputed question of where beneficial entitlement actually sits
• Waiting for an HMRC enquiry to open before taking advice, rather than reviewing an existing structure and its disclosure position proactively
• Comparing the promoter's fee only against the tax saved on paper, without pricing in the cost of unwinding the structure if HMRC's view prevails

What this means for property investors

If a lettings portfolio's tax bill is being driven up by Section 24, the routes that hold up are the ones HMRC has already tested: incorporating the portfolio properly where the numbers support it, or building a genuine structure such as a family investment company where economic entitlement actually matches the tax treatment claimed. A hybrid partnership that allocates profit to a company with nothing real at stake is not a shortcut around that analysis — it's the same problem, wearing different paperwork, and HMRC has now said so twice.

Common questions

What is a hybrid partnership structure for landlords?

It's an arrangement, marketed to buy-to-let landlords, where a lettings portfolio is transferred into a limited liability partnership that has both individual landlords and a corporate member. Profits are then allocated on a discretionary basis so the company takes a large share, taxed at corporation tax rates with full relief for mortgage interest, while the individuals' personal profit share, and their exposure to Section 24's mortgage interest restriction, is reduced.

Does HMRC accept hybrid partnership structures as effective tax planning?

No. HMRC set out its view in Spotlight 63, published in October 2023, and reinforced it in Spotlight 63a in 2026 after promoters began adding indemnity arrangements to the structure. HMRC's position is that the mixed membership partnership rules at ITTOIA 2005 ss.850C to 850E reallocate the corporate member's excess profit share back to the individual landlords, taxing them as if the structure had never been put in place.

What happens to landlords who have already set up a hybrid partnership?

HMRC can reallocate the profit under the mixed membership partnership rules and assess the individual landlords for the additional tax, plus interest, for open tax years. Depending on how the arrangement was marketed and disclosed, penalties for inaccurate returns may also apply, on top of the fees already paid to set the structure up in the first place.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

← All articles