Property investment LLP and tax
Question:
I am thinking of setting up a property investment LLP. The plan is to use this to buy offplan properties with a small payment on exchange (eg 5 or 10%) and the rest payable on completion.
I'm conscious of my legal position ans therefore want to ensure that I have some form of commercial protection in the event that the market collapses further and it is not worthwhile to exchange.
My questions are:
Can the LLP have a different profit sharing ratio for income tax and capital gains tax purposes?
Could I have a two tier profit sharing ratio so that preferred partners get all the income and gains buit the other partners just get the retained profits? This would make the interests held by the 'other partners' only valuable after I died. Could this be an effective way of reducing inheritance tax?
Answer:
Can the LLP have a different profit sharing ratio for income and capital purposes?
Yes, there would be no problem with this. You could specify a separate profit and capital sharing ratio.
HMRC statements of practice state that a partner's interest in the partnership for CGT purposes is assessed by using one of four tests:
Therefore this also implies that the capital ratio can be different to the profit sharing ratio.
Could I have a two tier profit sharing ratio so that preferred partners get all the income and gains buit the other partners just get the retained profits? This would make the interests held by the 'other partners' only valuable after I died. Could this be an effective way of reducing inheritance tax?
In terms of inheritance tax if this applied the preferential partners would still be assessed on the partnership assets as this would remain within your estate at the date of your death. For CGT purposes, they would be a member of the LLP, however on a future disposal of partnership assets they would simply be assessed on the gain arising based on their new capital sharing ratio (ie after the preferred partners die). Until that date any gain on disposal would be assessed on the preferred partners.
You would in any case need to take legal advice as to whether this would be acceptable in terms of partnership law.
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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