If you are still confused (and concerned) by Spotlight 63, rest assured, you’re in good company, as many landlords continue to struggle.

When HMRC issued Spotlight 63 (covered in our earlier article) in 2023, it sent a shockwave through the landlord community. Many were told they were using “fully compliant” tax structures, yet overnight, these same arrangements became the subject of an HMRC crackdown. If you’re a landlord who entered a hybrid partnership structure or are unsure if your current setup could raise red flags, you’re far from alone.

We have recently seen a sharp rise in new clients seeking our help. These landlords often feel blindsided as they thought they were doing the right thing, only to now face HMRC inquiries, tax reassessments, and the looming threat of penalties. But there is a way forward, and we’ve already helped many navigate it successfully.

What was Spotlight 63 all about?

Spotlight 63 was HMRC’s response to the increasing number of “hybrid” landlord tax schemes. These schemes typically involved setting up a Limited Liability Partnership (LLP) and including a corporate member within that LLP. The idea was to allocate rental profits to the company to access lower corporation tax rates, often significantly reducing overall tax liabilities.

On the surface, this seemed like a clever workaround to the changes in landlord taxation. But the key issue was not simply the structure itself, but how it was being used. HMRC made it clear that where these structures appear artificial or are used solely to gain a tax advantage without genuine commercial substance, they would be challenged.

The mortgage interest relief catalyst

Let’s rewind briefly and look at the history of this growing issue. These types of schemes became popular after HMRC began phasing out mortgage interest tax relief in 2017/18. By 2020/21, higher-rate taxpayers were feeling the squeeze, paying full tax on rental income and only receiving a 20% tax credit for mortgage interest.

For landlords with significant borrowing, this was a profound shift, and many saw their tax liabilities increase. It was no surprise to see promoters of new tax strategies step in with solutions that promised to restore some of that lost relief. Unfortunately, the risks and complexities of these schemes were often underplayed, with many landlords now paying the price.

The problem isn’t just the structure – it’s the mismatch

What HMRC takes issue with is not necessarily the use of an LLP or a company in itself. It’s the intent and execution. When income is redirected for tax benefit purposes but control or beneficial ownership doesn’t truly change, HMRC may invoke the settlements legislation. The General Anti-Abuse Rule (GAAR) and other doctrines allow HMRC to look beyond form and consider the substance of an arrangement.

This means that even if something is technically legal on paper, if the overall effect is deemed to be tax avoidance, HMRC can ignore the arrangement entirely for tax purposes. That’s where many landlords are now finding themselves: caught in a grey area between intent and implementation.

What we’re seeing on the ground

At Wilkins Southworth, we’re helping a growing number of landlords who now find themselves in complex and often distressing situations. Many are facing HMRC “nudge” letters, which suggest the taxpayer may want to revisit a previous return. Others are under full compliance reviews.

In nearly every case, the landlord acted in good faith, but, as we know, that doesn’t resonate with HMRC. They were often sold the idea of a “fully legal” and “compliant” tax structure, backed by seemingly credible advice. Now, they’re having to pick up the pieces. The financial cost is significant, but the emotional toll of feeling misled can be just as heavy.

In practical terms, these landlords are now being asked to revisit their accounts for multiple tax years. Some face large bills for backdated tax, interest, and penalties, while others are simply unsure what to do next, and whether to wait for HMRC to make the first move.

The good news: There’s a way through this

Despite the heavy tone of Spotlight 63, this isn’t the end of the road. In fact, we’ve seen excellent outcomes for landlords who act early and engage constructively with HMRC.

Our approach begins with a thorough review of your structure and tax filings. This helps us understand the extent of any risk and advise on the most appropriate way to move forward. We may recommend an unprompted disclosure to HMRC if no enquiry has started, or a different strategy if contact has already been made.

The key is communication, because by demonstrating transparency and a willingness to resolve issues, we can often:

• Negotiate reduced (or even eliminate) penalties
• Agree on affordable repayment plans
• Help clients exit unsuitable structures cleanly

These outcomes are not just theoretical; we have achieved them for numerous clients in recent months.

Landlords: Don’t wait to be contacted

If you’re reading this and thinking, “This sounds familiar,” now is the time to act. Waiting for a letter from HMRC reduces your options and increases the chance of penalties.

There are a few common traits we see in high-risk structures:

• LLPs with a corporate member
• Structures set up between 2017 and 2021 marketed to reduce tax
• Promises of reclaiming mortgage interest relief via complex entities

If any of these apply to your situation, it is worth seeking a professional review.

The earlier we can assess your situation, the more proactive your response can be. In many cases, clients have been able to resolve matters with minimal financial and reputational damage simply by taking action at the right time.

Thinking about tax-efficient property ownership? Do it the right way

For newer landlords, or those looking to expand their portfolios, it’s essential not to be put off by what you’ve read so far. There are entirely legal and sensible ways to reduce your tax bill. But these must align with your actual business model and goals.

We regularly advise landlords on a range of strategic tax options, including:

• Incorporating a property business when appropriate
• Establishing Family Investment Companies for intergenerational planning
• Exploring CGT deferral relief and other landlord-specific measures

The crucial thing is this: your tax plan should reflect your real-world business, because if a structure only exists on paper, HMRC will see through it. But if your setup mirrors how your property business genuinely operates, it stands on much firmer ground.

Spotlight 63 Final thoughts: Experience matters more than ever

Tax isn’t just about numbers; it’s about strategy, structure, and knowing how HMRC thinks. If you’re worried about Spotlight 63, are unclear about your current setup, or just want to avoid stepping into a future problem, we’d welcome the chance to help.

We’ve already supported many landlords in your position, and we can help you, too. Our experience in both technical tax law and practical negotiation with HMRC gives our clients a much-needed advantage.

If you’d like to discuss your position in more detail, please get in touch.