What is an 'LLP' and what tax advantages does it have?
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.
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 45% income tax on the LLP profits, whereas a company may pay corporation tax at a lower rate (20%). 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 30.55% 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.
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 not 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).
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.
Tax Question: My questions are related to using an UK LLP formed by non-residents off-shore companies and/or natural persons. This LLP is being formed to provide international services related to business aircraft brokerage and consultancy services. So, the questions are: 1. Which are the implications regarding income taxation on this UK LLP, concerning the tax transparent system? Having one IBC BVI company and one non-UK resident person as partners, or having two BVI's companies as partners change the results, regarding the pass-through treatment in the UK? 2. Most of the businesses, let's say, 95% presumably, are expected to be done without any UK entity. Having, by chance, one or another occasional business involving an UK Entity, let's say again, an UK biz jet being sold to Mexico company, where we (the Uk LLP) are going to be the sale's agent, receiving an brokerage fee, I understand that on this case, incoming tax is applicable for that specific transaction, right? Secondly, if the UK LLP does use a London based virtual office, just to have an UK Address and a phone number, that will cause any impact on their others non-UK transactions, concerning the pass-through treatment? Thanks for your attention, Leo keep reading
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
Tax Question: Hi Grandfather who is a partner in LLP - can he gift his share to his grandchildren and if so what is required. keep reading
Tax Question: HI , 2 individual are setting up an LLP . The 2 individual will set up 2 companies to be appointed as members. The LLP will hold the lease for premises , employ staff and day today running of the facility. The 2 LTD will operate on their own , consulting client and invoicing the client directly. The 2 LTD will pay the LLP a fee for the usage of the facility. The LLP will also have its owns activities secondary to the Ltd and and complementary services to the LTD. Is there any tax issues to be aware of ? Thanks keep reading
Tax Question: Hi, What are the specific rules for mixed LLP's where the members are both companies and individuals and what are the issues with profit allocations? Thanks Dickens keep reading
Tax Question: HI, 2 person A and B wants to set up an LLP in the UK. A and B are not uk resident but they will come to the uk from time to time to perform their activity and they have an office here. A and b will set up to LTD to be the members of the UK LLP and the will also rent a flat in the UK. Questions: - any implication for this set up if they use a company as members - the partnership agreement will contain a clause where A and B will share the profit based on the work perform /invoice issued, is this possible? - the profit received from the LLP , will these suffer corporation tax or will they be classified as income tax (individual)? Thanks keep reading
Tax Question: I am a non-UK resident, holding an interest in a relatively newly formed UK registered LLP (the other member is my Ltd company registered in my country of residence). The LLP has no UK trade nor presence. What is the correct way of registering the members as partners with the HMRC to ensure that no UK tax is due? I have been told that the partners should register through forms SA401 & SA402, and will be automatically issued UK tax returns, but can then request that the submission requirements be cancelled as there is no UK trade or presence. Is this a correct assessment or should non-residents use another procedure? keep reading
Tax Question: Hello, Thank you for taking the time to respond to these questions. Description of the structure : Mr X is a UK resident Non Dom. While being UK resident, Mr X setup an offshore company, 100% oned-managed-controlled by himself in the UK [to keep things simple at the beginning]. A friend of Mr X setup at the same period of time a UK LLP. The Offshore company becomes a partner [designated member] of a UK LLP and as such, will invest in the UK LLP. The profits generated by the LLP will be UK profits. Questions : Based on chapters 720-730 of the income tax act 2007, if Mr X transfers assets [cash] to fund from scratch his offshore company he will become liable to income tax on profits arising from this offshore company, assuming no exception fits. Question 1 : if all profits are retained in the offshore company [assuming the offshore company is seen as opaque for tax purposes by HMRC], is mister X liable to any UK tax regarding this offshore company profits? -- If Mister X works as an employee [non member] of the UK LLP, receiving only a small salary for his contribution. Based on HMRC s publication of the 27th of March Mixed membership partnership , fighting Excess profit allocation diverted from individual members to non individual members. It says an individual member [it seems only to speak about members and not employees but I would like to have your view please, if an employee would fall into the context of that publication] having the power to enjoy a non individual member excess profit allocation [that is the case for Mr X] will be liable to income tax on the non individual member profit. Question 2 : Can Mr X, employee of the UK LLP, be liable for income tax on the profits allocated to his offshore company ? -- Question 3 : If the offshore company is seen as opaque for tax purposes by HMRC. It would pay 20% crporation tax in the UK, is that right ? Thank you for your time. keep reading
Tax Question: Hi, A french national will become a member of an LLP which will have activity in the UK [i.e the french national will physical carry out the activity here]. Does this french national need a National insurance number? keep reading
Tax Question: Hi I am setting up a company in the UK. Our operations will be based in India. I want to know the benefits for setting up of an LLP in terms of Tax. I know that LLP are exempt from corporation tax but the partners are suppose to pay taxes on their individual profit share. then how can I save tax by having an LLP as opposed to LTD. LTD company the corporation tax will be eg 26%. However as an individual if I am already paying 40% income tax then on my profit share from the partnership I will pay 40% tax as opposed to 26% if I was to open a LTD company. Benefit of LLP is that the partners can ringfence their assets for any liability. but how is it better in terms of tax saving? keep reading
Tax Question: Limited company in car hire plans to open a llp as a subsidiary , 75 %owned with profits divided between the holding company and two human partners [ also directors of the holding company ] the partners will be paid 12.5% o the profits each and will be provided with the use of a car - whatever car suits the llp /whatever is available. we expect that this will amount to about i weeks use of up to 50 cars each year [ each ]. am i correct that the capital allowances will be restricted on each car by 2% bt otherwise the allowances restrictions will not apply? cars will be kept for two years on average of course each car will be included in a separate pool, are there any other issues that i need to be aware of ? many thanks keep reading
Tax Question: Dear Sir I would refer you to tax book Non-resident & off-shore tax planning 2014/2015. It is mentioned that 'If an LLP is a mixture of UK and overseas partners, it would be the UK partners that would be taxed in the UK ,with the overseas partners being taxed in their country of residence.' However the guidelines from HMRC and others mention that non-resident partners would be taxed on the share of their UK income. Could you kindly clarify this matter. regards Diamond keep reading
Tax Question: Hi, I am about to leave the UK, making a clean break and setting up a business and taking up residence in Malta. However, I will still have some consultancy clients who are UK based, some who may be a bit sniffy about dealing with non UK companies. I am therefore considering setting up a UK LLP with UK VAT registration with myself and my Malta company as members to deal with these clients. I know UK LLPs are usually considered a "pass-through" entity for tax purposes, however my question is: - If there are UK customers being served through a UK LLP with UK VAT registration, where all LLP members are non-resident and there is no UK permanent establishment, would there be any UK tax due, or would this still be eligible for pass-through taxation? keep reading
Tax Question: Hi, My wife and I have two Buy-to-Let [B2L] properties and our own house, but we are 40% tx payers. All three properties are mortgaged. We are considering another B2L, and wondered about the benefits of purchasing via an LLP or company [either of which would need to be set up]. An LLP looks quite attractive as we are looking to the longer term as retirement income in c.10 years' time. However, it also seemed interesting to see whether the B2L income could be used for paying university fees/living expenses [i.e. two children that would become partners on reaching 18 years of age] as the income could be diverted to them and fall within their tax allowance. Finally, we would be looking in the much longer term as a means of minimising inheritance tax. Questions: 1] Should we be looking to set up an LLP in the short term? 2] What happens to STLD on purchasing a property? 3] What would be the implications of transferring the existing B2L properties to the LLP? 4] Can we effectively direct LLP profits to the children for university fees/general living expenses in the way I think? 5] Impact on IHT when it comes to it? Many thanks keep reading
Tax Question: Our client and his partner trade through an LLP which owns a saloon. Another saloon is owned by a limited company which is again equally owned by our client and his partner. Our clients would now want to transfer the saloon owned by LLP to the limited company. What will be the tax consequences? How will the LLP be dissolved satisfying any statutory requirements. The saloons are both profitable. In order to maximise entrepreneurs relief would it be better to have both saloons in the LLP? thanking you keep reading
Tax Question: I have a doctors group who are running their consortium as a LLP to run a consultancy business. It has been suggested to them that each doctor forms his own limited company and then each limited company becomes partner in the LLP. I have heard that rules in this respect have changed and HMRC are challenging this kind of arrangement . The LLP accounts can not see any problems so can I can your opinion on this please. keep reading
Tax Question: A property development LLP. Its members personally own the property which was bought 2 years ago and now converting into 6 apartments for residential letting. Can the members claim the cost of conversion from the property development LLP ? Will the members be able to lease the property to the LLP Business and enclose a sub-letting clause in the contract? keep reading
Tax Question: Re: LLPs with Corporate Members Hi Lee Thanks for your previous answer, much appreciated. If you have an LLP as a trading entity and its partners are 2 people [husband and wife] plus a Ltd Co, we now have to take care not to allocate a disproportionate profit to the Ltd Co - at least as I understand the new rules. So if the LLP makes say ?120k and allocates ?40k to each partner, then that is near perfect use of personal allowances etc. Question 1: If the profits rise to ?160k and this is allocated ?40k to each individual and ?80k to the Ltd Co, I assume this could be targeted as disproportionate? Or does disproportionate not kick in until it gets very extreme like 10%, 0% ad 80% alocations? Question 2: If this example is disproportionate, then couldnt the LLP take on a 4th partner - another Ltd Co and again allocate profits equally between the 4 to achieve the desired outcome? Question 3: Indeed couldnt the number of Ltd Co's not increase in line with profit growth [within reason of course!]? I recognise the Ltd Co's must have their own trading activity to be legitimate which ultimately limits this strategy to a small number. Thanks again for your help which is much appreciated. Regards Simon keep reading
Tax Question: Hi Lee, When an LLP has a [UK] Ltd Co as one of its partners, how does the Ltd Co account for the income from the LLP? It obviously cannot be included as turnover else there would be a VAT implication. So how does the Ltd Co correctly account for it? Also I assume the timing of the income allocation would be the year end date of the LLP irrespective of when the cash is actually transferred? Thanks for your help. I am really enjoying your materials too! keep reading
Tax Question: Hi, LLP involved in a trade of goods in Netherlands and Italy but also with fixed assets in UK [properties]. LLP members are non UK residents. The LLP issue capital is 100GBP and reported on the financial accounts. The properties values are showed as "Fixed assets" and "Members interests" inside the financial account. My question: what will happen if a customer start a legal actions over the LLP regarding the liabilities ? Could the customer [if it win] take over the LLP assets [properties] or the liability of the LLP is limited to the 100GBP of capital ? Please note the beneficial owner of the properties are the members and they are registered under the NRLS with HMRC. keep reading
Tax Question: Hi, UK LLP with 2 non resident partners. Main business is software development [80% trnover and trade outside UK with only non uk resident customers and 3 main distributors in Italy] and the remain BTL business in UK [the partners are registered for NRLS]. We received an offer to buy only the software business in full. I would like to know if in your opinion there are any tax issue selling only the software business to a UK non resident company. The sell essentially will be in the form of an agreement where we will transfer the software source code, a eu registered trademark and the distributors agreements. keep reading
Tax Question: Hi, I'm going to live with my wife and 2 children in a UK property where the landlord is a UK LLP with a PIF as member. The PIF is registered under NRLS with HMRC and the beneficiaries are my wife and children. The PIF director is my father (non resident in UK). In order to avoid any benefit in kind problem do you think the LLP should arrange an AST with me and my wife at market price or do you think also a simply rent free Agreement could be permitted ? keep reading
Tax Question: If a property investor [PI] owning several properties wanted to transfer 50% ito one of their children's [>18] name [C] as tax efficiently as possible, could this solution work: PI introduces property into an LLP with PI's ltd co and C's ltd co as members. C only becomes entitled to ?125k interest in property on introduction to avoid stamp duty. Additional 125k interest in property is transferred each tax year until the companies' interests in the properties are 50:50 through the LLP [backed up by LLP agreement and profit share of rental]. C purchases new properties and introduces them into the LLP and transfers interests in these up to 125k each year to offset the amount being transferred for IHT purposes. Thoughts? keep reading
Tax Question: Hi, I was resident in Italy in 2013 [fiscal year 1.1.2013 - 31.12.2013] and I will be resident [non dom] in UK for the fiscal year [6.4.2014-5.4.2015]. I have received a large sum in an offshore account last 31.3.2014 after resigned as member and executive director of a UK LLP [this LLP doesn't trade in UK and all members are not resident in UK]. I suppose that sum is outside the italian revenue scope [Italy doesn't recognize split year treatment so if you simply are abroad more than 6 months you are not resident for all the year] and that sum is also outside the HMRC scope [the UK fiscal year start 6 April and I could also ask to postpone residence with split year treatment] so I could remit in UK it free of tax due my non dom status. What your opinion about this ? Is it correct ? Do you have any suggest ? keep reading
Tax Question: Dear Sirs, I have an LLP arrangement involving myself, my wife and Corporate Partner. If I introduce rental property with a mortgage [held in joint names between myself and wife] into the LLP does SDLT apply or is it tax transparent for this purpose? keep reading