Re:LLP's with corporate members and allocating profits - USERNAME: Kerviel - 26/06/2014
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
Answer:
Yes you do need to watch out for the new rules, however they will only apply where various conditions are met. In the above case it's likely to be where
(i) the company receives an excessive share of the partnership's or LLP's profits;
(ii) the individuals have the "power to enjoy" the company's profit share and
(iii) it is reasonable to assume that the company's profit share (or part of it) is attributable to the individual's "power to enjoy".
So the rules will only (usually) apply where the company is connected to the individuals. Where it is you'd then need to look at the share that the company receives and compare this to the return that would be expected on the capital it has introduced and the services it provides for the LLP.
The number of companies isn't really the issue.
We have provided a technical analysis of this for Practitioner members in our Practitioner Zone at: