Limited liability partnerships ('LLP') were introduced in 2001 and offer a cross between a partnership and company structure. They were mainly introduced to offer large professional firms that trade as partnerships (accountants, lawyers, surveyors etc) the opportunity to benefit from limited liability, just as a company can.

Put simply an LLP is a partnership which provides the partners with the benefits of limited liability - thus ring fencing their personal assets from any potential business creditors (just like a company would).

Having said that, the LLP would be subject to the same asset protection limitations as a company would, and if for example the LLP was clearly being used for a fraudulent activity the courts wouldn't hesitate to look at the partners to make good any liabilities.

Partnership Structure

Although in general law an LLP is regarded as a 'body corporate' and is like a company, for tax purposes an LLP is normally treated as a 'partnership'.

Therefore an LLP will normally be regarded as transparent for tax purposes and each member/partner will be assessed to tax on their share of the LLP's income or gains as if they were members of a 'normal' partnership

Therefore if an LLP carries on a trade, each registered partner is taxable on the income they derive from the LLP as trading income.

This is a crucial difference from being a shareholder in a company. A company shareholder is regarded as a separate entity for both legal and tax purposes. An LLP however is a separate legal entity purely in legal terms.

Therefore a company shareholder is not (usually) taxed on the profits of the company, just the cash that is extracted from the company (either as salary/benefits or dividends). A member of an LLP is however taxed on his or her share of the profits that are generated by the partnership.

For a higher or additional rate taxpayer they would therefore pay 40% or 50% income tax on the LLP profits, whereas a company may pay corporation tax at a lower rate (20%/27.5%/26%%). The problem with a company would be that although the rate of corporation tax is lower than the LLP's income tax rate to get the cash out of the company a further tax charge may then be payable (25% on a dividend extraction from a company for a higher rate taxpayer or an effective 36.11% for an additional rate taxpayer).

It would therefore be only if either cash was retained in the company for business activities, if cash was extracted up to the higher rate tax band or if you were going to extract cash as a non UK resident, that a company could offer significant reduction in taxes on income generated.

Interest relief

In terms of interest relief, where an LLP carries on a trade, the members of the LLP who are individuals are entitled to claim interest relief on the loans they obtain in order to purchase a share in the partnership. There are additional conditions that would need to be satisfied (eg you must remain a partner to the date of the payment of the interest and must not recover capital from the partnership).

Note if the LLP was assessed as undertaking an investment business (eg property investment) no interest relief would be due.

Any interest relief would be claimed on your self assessment return and you could obtain a mortgage for this purpose.

Capital gains tax

As a share of an LLP is treated as a share in a 'normal' partnership, on a future disposal of the partnership the tax treatment would be the same as for a disposal of a partnership interest.

The main relief for a trading partnership is Entrepreneurs Relief. On a future disposal of the partnership you may qualify for the lower 10% rate of CGT.

Note however that this will apply only to trading partnerships. If the LLP was classed as undertaking an investment Entrepreneurs Relief would be due. This would effectively increase the CGT rate to 28%.

Other reliefs that a partner in an LLP may be entitled to include rollover relief and gift relief , (which are looked at in other articles).

Inheritance tax

Again, trading partnerships have an advantage as the members interest in this should qualify for business property relief ('BPR'). This can effectively eliminate the value of the partnership interest from the deceased's estate.

One point to watch out for is that if land or buildings are owned personally but are used by a partnership in which you are a partner the rate of BPR is reduced to 50%. If the IHT charge is significant it may be worthwhile considering transferring the land to a discretionary trust, provided the land is worth no more, after the 50% BPR than the nil rate band (currently £325,000).

Therefore in summary, LLP's offer a good 'halfway house' between a partnership and companies and can be very useful. Check out the article on investing in US property to see where a UK LLP can be beneficial.

LLP Tax Calculator If you're interested in using an LLP our completely unique "LLP Tax Calculator" is essential. Enter your profits and the number of members and it compares the total tax and net receipt if you use an LLP or a Ltd company. You can access the LLP Tax Calculator here: LLP Tax Calculator You may also be interested in our other using a company tax calculators eg: Using a company tax calculator Property company tax calculator Entrepreneurs relief tax calculator

LLP Articles and Q&A's Late filing penalty for LLP in cessation? - USERNAME: Johnsmith99 Tax Question: I have been assessed a £100 penalty for the failure of a LLP I was a member to file a return for 2009/10. The LLP in question ceased to trade in 2008/9 and was wound up in that year. the LLP did not file a partnership return for 2009/10 on the basis that it had ceased to exist in the prior year. My personal tax return - ticked the box which confirmed that I was Not in a partnership. HMRC have turned down my appeal against the penalty on the basis that "There was no cessation shown on either your personal tax return or the partnership tax return. There is no note on either record to advise that the partnership has finished." Questions 1. How can a LLP fine a return if it doesn't exist? 2. Are they correct to refuse to rescind the fine given that: - In my personal return, I ticked the box to confirm that I wasn't a partner. - the fact that the LLP was wound up is a matter of public record at the Companies House 3. Given that there is no tax due at all does the fine still stand. Thanks as always. . . . keep reading Romanian resident and UK tax on trading profits using an LLP? - USERNAME: kimov Tax Question: Hi, I am a non-uk resident(Bulgaria registered company) and I would like to set-up an LLP in UK with another non-uk resident(Bulgaria registered company)or in a partnership with an UK person/resident. I have a web site selling travel services (transfers and car hire) in Romania, European union. I sale this services to customers from all over the world including to UK customers/residents. All travel services and the maintenance of the web page are solemnly implemented in Romania only. Is my business considered from UK source of trade and carried out with or within UK in regards of taxation of my income as a partner in the UK LLP? Is my income as a non-UK resident/member/partner in a LLP liable for taxation in UK or in Bulgaria? Thanks a lot for your time and advise in advance. D . . . keep reading Non resident LLP to purchase UK property - USERNAME: peppino Tax Question: Background: I'm going to buy a commercial property in the UK using my UK LLP. The LLP partners are two: me with the 100% shares and my father at 0% shares, all non uk resident. At this moment the LLP already trade outside the UK and the profits are outside the scope of UK tax. After the property acquisition I should deal with HMRC to activate the NRL scheme for me in order to receive the rent from this property without tax deduction. This also should permit me to obtain the personal allowance from HRMC against the rent income, BUT I think I could live in the UK for some year with my relatives in the next future so the NRL scheme won't be suitable anymore in this case. Question: Could it be useful to make an appropriate structure since now in order to maintains the NRL scheme in case we will come UK residents ? Could an appropriate structure be adding a new member to the LLP (a Trust or a Panama Private Interest Foundation (better to have more flexibility) with my children as beneficiaries ) with a 0% of shares into the LLP but the only registered to HMRC into the NRL scheme ? In this way this new member will maintain the NRL status also if I will be UK resident. Is it a suitable solution ? . . . keep reading LLP retaining income? - USERNAME: t.dhanjal Tax Question: Can Limited Liability Partnerships retain profits under retained earnings and time the distribution of these when it could be more favorable to the members from a tax perspective? If yes, are there any tax consequences of doing so? . . . keep reading Corporate member of LLP? - USERNAME: t.dhanjal Tax Question: Is it possible for Ltd. Companies to be members of a Limited Liability Partnership instead of legal individuals? Can this become contentious from a tax perspective, distributable profits flowing through to the Ltd Co's? . . . keep reading Trading in the UK with a UK company/LLP and how to minimise tax 08/12/2010 If you're a non UK resident looking to carry out any business activities in the UK you should carefully consider whether there could be a charge to UK tax, and if so how this can be mitigated. In this article we look at the dangers of a UK permanent establishment, how this can be avoided and how a UK company or LLP could be used . . . keep reading Corporate partner in LLP and small company tax rate - USERNAME: davidrt Tax Question: Follow on question to the transfer of a direct interest in a LLP to a corporate vehicle. If the vehicle company does nothing but hold the LLP interest and receive allocations of trading profits and possibly makes capital contributions, if required, will it be treated as trading for corporation tax purposes and therefore able to access the small companies rate (assuming that the profit level qualifies for this)? . . . keep reading Disposal of company/LLP & tax implications - USERNAME: Byron Tax Question: I have shares in a private limited company of which I was a founder member and former director. This company has converted to an LLP. The company or the LLP is likely to be sold to a PLC What is the capital gains situation if: 1.The plc buys the LLP for cash? 2.The plc buys the company for cash? 3.The plc issues it's own shares as a swap for the shares in the LLP or the private limited company? . . . keep reading Transfer of interest in LLP to a company - USERNAME: davidRT Tax Question: We are a 2 partner LLP facing the issue of 50% income tax. I wd like to introduce a corporate partner to receive a proportion of my profit share with a view to mitigating the 50% band. My partner prefers access to his earnings whereas I am happy to see them (in part) rolled up in a corporate vehicle for a number of years ahead. This means that I would be the sole owner of the corporate member. How attackable is this structure from a HMRC perspective? . . . keep reading LLP and CGT - Follow up - USERNAME:rob.green7 Tax Question - Follow up Hi Thanks for your speedy response. I am told there is opportunity to use incorporation relief here as effectively my purchase of land was as a sole trader/individual and this business has now been incorporated. What are your views on this? . . . keep reading Non resident moving to Malta and UK tax on LLP profits Tax Question: I'm wondering what the best form of incorporation would be for the following business/situation. My wife is a Polish born citizen to Polish parents and has lived in the UK for the last 8 years. I am a dual UK/Irish Citizen and have lived in the Uk all of my life except for 2 years in Ireland about 10 years ago. We are about to start a new business, the business in question is currently VAT exempt so we won't need to register or worry about that side of things. We are planning to relocate to Malta in the next 2 years. My wife will relocate as a permanent resident, I expect to spend my time split between the UK and Malta but will involve me spending large blocks of time in the UK working with the business. Due to the highly regulated nature of the industry we will not be in a position to turnover companies. So my question is this. What type of incorporation will be the most tax efficient? If we set up an LLP with my wife as an equity member of say 90% would she be liable to UK tax? If we set up an LLP with an offshore company under my wifes control as the main equity member could we remove profits without taxation. To sum it up is there a way to run a UK business without taxation using my wifes future permanent residency status in Malta. If not which is the best way to go LLP or LTD. . . . keep reading Tax on partners of LLP investing in UK property Question: Hi, I am a member of a UK LLP that manufacture software in Ireland directly sold to some EU countries. Due to the fact that all LLP members are not resident in UK and the software products are manufactured abroad we are not liable to UK tax. We would like now reinvest some profit in UK buying a property for a buy-to-let business. The property will be hold into the LLP name. My two questions: 1. As I know the LLP member have to registered to the HMRC on the Non Resident Landlord Scheme in order to receive the rent income without tax deduction. Is it right ? 2. As I know the software profits will remains exempt by tax in the UK and the rent income (that the LLP will collect on a segregated bank account) will be subject to the 20% basic rate after deduction of the property costs. Is it correct or could be better to create a different company (offshore) to hold the property in order to separate in full the two business (software & buy-to let) ? I am a bit worried about the possibility that HMRC could tax in the UK the software business too but I would like - if possible - manage all the two business through the LLP. Pls. note that the LLP has registered for VAT and already hold a small property in the UK as representative office and to be used from the LLP member when they are in the UK. The LLP has been incorporated in 2001. Let me know. Thanks. Best Regards, . . . keep reading LLP/LTD as personal holding company Hi, I'm UK domiciled and UK resident, owning the majority of a UK Limited trading company and shortly to incorporate another. I'm drawn to the use of a personal holding company to roll-up/re-invest dividends with potential for later tax-efficient extraction when I'm not resident. However, I also don't wish to lose Entrepreneurs Relief which I understand would be the case with an LTD so am drawn to an LLP. There I risk 50% tax on higher than intended dividends and inability to roll-up as I'd like. I've read about corporate partners and wonder if they can be minority, e.g 1%, to gain the LLP benefits in capital terms, but with the ability to vote a proportion of the dividends due to be diverted to the LTD for roll-up? I understand re-investment would be a challenge as I'd end up with cash in the LTD and may need to take a hit on extraction or invest via the LTD. To be clear the only partner and shareholder would be me! Thanks - great site. I came here to learn about tax on dividends from a Cyprus holding company so the whole LLP thing is your doing!! cheers, Simon . . . keep reading Corporate partner within an LLP Question: We are members of an LLP. We have purchased goodwill using bank finance. We have reallised that we are paying 40%/50% tax on profits we are retaining to pay the capital back. Can we introduce a corporate partner transfer the goodwill from the LLp to the limited company, leaving a blance due from the limited company to the LLP. The corporate partner would have a share of profits, we wouldn't have to transfer funds as there is a loan account between the two entities so there are no overdrawn laon account issues. Can you see any problems with this? . . . keep reading Trading foreign exchange - using an LLP? Question: Interested in anyone with relevant experience or advice - obviously to do it properly i will have to pay for detailed advice, but any comments would be welcomed. I have been a member of an LLP trading foreign exchange for several years (relatively successfully). This will eventually end and i wish to continue trading foreign exchange on my own. Given that returns are (hopefully) going to put me in top tax bracket, AND i am relocating to Scandinavia with family(the EU bit !) in 2 years, probably for long enough to become non resident, was looking at company vehicle until and perhaps beyond 2 years. There may be other partners (very few) but not decided on LLP/Ltd company yet on commercial grounds alone. The business has few physical assets but a large amount of working capital used as collateral - this must be loaned to the company initially. The drawing requirement is quite discrete - i am happy to leave most returns in company to draw off over long term - return of initial capital can easily fund me for several years. The Scandinavian country am relocating to is in EU and has options to draw fraction of capital from company at discrete taxation levels, but anything in excess deemed as income will be heavily taxed. Am primarily looking to slow down income drawings over a period to keep me out of relevant higher tax brackets - am happy to pay reasonable amount of tax but am reluctant to be hit heavily over what might be a short term earnings window. Does anyone have relevant experience with this sort of setup or circumstances. . . . keep reading Avoiding the remittance rules by using an LLP? Question: Non-domicile resident is receiving income from property abroad. Currently claiming the Remittance Basis, but 7/9 deadline will apply soon. How can one mitigate the tax liability? I heard that if the overseas property is transferred into UK based LLP its rental income is not liable to UK income tax. Is it correct? If not, are there any other ways (such as creating another UK company which holds this property or anything else) not to pay UK tax on the income from overseas property, given the recent new Remittance law? . . . keep reading Taxes for LLP /Ltd companies Question: What is the difference between taxing for members(investors)if the company is setup as LLP or if it is set up as a limited company. Also how is the corporate body of the LLP taxed? . . . keep reading

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