Mixed Partnerships and Hybrids For Section 24?

Mixed partnerships (sometimes known as hybrid structures) are promoted as giving certain tax benefits to landlords that a company would give, while avoiding the potentially expensive capital gains tax and stamp duty that may be due if you chose to incorporate your portfolio. One of the main reasons for the increase in interest in such a structure is that some see it as being the answer to the increase in income tax from the Section 24 mortgage interest changes, where mortgage interest is being phased out as an expense for some landlords.

However, anti-avoidance legislation was introduced in 2014 to prevent the tax benefits being received by abusive partnership arrangements.

What are Mixed Partnerships?

Put simply mixed partnerships are a partnership structure that has a non-individual partner. This is usually a company. For a landlord who holds properties individually, this can be set up so that the landlord is a partner with a company they have set up.

With partnerships, or limited liability partnerships, income tax is normally based on the partner’s own share of the income. This is then taxed at the rate that is relevant to them based on the level of other income. Where a partner is a company, the company can be used to obtain more favourable tax rates on rental income.

When does the anti-avoidance rule apply?

A new rule was introduced in 2014 to prevent a mixed partnership from giving an excessive profit allocation to the company which the individual partner can then benefit from. The question here is what is an excessive profit?

The legislation considers both the capital contribution by a company and any notional consideration for services provided by the company. So, put simply, has the company done anything or contributed anything to the partnership?

Often with these structures for landlords, the capital contribution comes solely from the individual landlord in the rental properties that they own, meaning there is no capital contribution from the company.

If the company has provided some form of management services to the partnership, it is important that only a market rate management fee is used. It is also highly recommended to have a written agreement in place as to the services that the company provide and the rate of reimbursement, to justify that any profits distributed to the company are not in excess of what you would pay an external company in an “arms-length” transaction.

When profits are excessive to the capital contribution and consideration for services provided, the question is then whether the individual has the power to enjoy the profits that are allocated to the company. This means whether the individual partner benefits, at some point, from the profits that have been allocated to the company.

If this is the case, and as a result of this you have paid less tax than you would have done, had the excess profits been allocated correctly, then there are some consequences.


The anti-avoidance provision allows the individual profit share to be increased on a just and reasonable basis. The equivalent amount of profit that has been allocated to the limited company is reduced. You would be liable for any tax underpaid, but this can just be the beginning. On top of any tax owed there would potentially be penalties, interest and the professional costs incurred in dealing with a HMRC investigation.

There are some non-financial consequences of a HMRC investigation, which can be quite a drawn-out process. This includes the stress of being under investigation and potentially attracting further attention regarding your tax affairs in the future, if you have been found to be incorrectly completing your tax returns.

Another issue is that merely submitting a tax return does not mean that the way the profits are allocated, or the tax position, has been accepted. Unfortunately, HMRC confirming receipt of a tax return does not mean that it has been accepted. HMRC will not confirm that a tax return is acceptable. You will only know once the time to bring an enquiry has passed.

A tax return normally can be investigated up to 12 months after submission (if made on time) which on the face of it doesn’t sound too long. However, there are further wide-ranging provisions to extend the period that an investigation can be opened. If it is judged that the taxpayer, or representative of the taxpayer, brought about the underpayment of tax deliberately, HMRC could investigate your tax affairs up to 20 years after the end of the relevant tax year. That is potentially a 20 year wait to confirm HMRC have “accepted” your tax return.

Supporters of mixed partnerships to mitigate Section 24, have said the anti avoidance provision does not apply where there is no intention to secure a tax advantage. Leaving aside the fact that using a mixed partnership to avoid the impact of section 24 means there is the intention to secure a tax advantage, the legislation actually makes no mention of whether or not there is an intention to secure a tax advantage. It actually says that it must be “reasonable to suppose that” the individuals’ “profit share and relevant tax amount are lower than they would have been.”  There is nothing in the provision that mentions intention.

The profit that can be attributable to the company is based on capital contribution and the notional consideration for services the company provides. The HMRC guidance states “In almost all cases, this notional consideration should be no more than the cost to the company in providing the services plus a modest mark-up.”  So that means you can’t just stick the whole amount of profit in the company in return for management services! The full provision can be read by clicking here.  The HMRC guidance can be read by clicking here. 

There were also anti avoidance rules brought in (again in 2014) to prevent the transfer of an income stream by a partnership. These rules effectively prevent the tax advantage of moving an income stream from a partnership to another person (in this case meaning a company) and obtaining a tax advantage.

The legislation states: “the main purpose, or one of the main purposes, of one or more steps taken in effecting the disposal is the obtaining of a tax advantage for any person.” Therefore if you are approaching this structure and it is judged that one of the main reasons are to gain a tax advantage, any tax advantage is effectively ignored and you would pay the same tax had no transfer taken place.  Please click here to read further. 

It is also worth considering that some case law (Leasing (No1) Ltd V HMRC) established a principle that having a genuine commercial motive does not mean that you also cannot have one of the main reasons being to gain a tax advantage.  Please click here to read further.

Conclusion of Mixed Partnerships (It is not the Section 24 answer!)

We generally do not advise this structure unless profits are allocated in a way that is acceptable with the legislation. If not, a mixed partnership could just be the worst decision you ever make.

It is important to distinguish between the mixed partnerships and a standard LLP used to hold property investments. There are certain circumstances where an LLP is very beneficial to use. It can provide great flexibility with allocating profits between individuals. This would not be covered by the anti-avoidance rules as there is no non-individual partner. These can also be used to assist with succession planning.

For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here

Mixed Partnerships