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The Taxation of a Limited Liability Partnership

Taxation of a limited liability partnership

While the LLP is a corporate body with separate legal personality, for tax purposes the limited liability partnership is to be treated essentially as a traditional partnership. The key features of the statutory provisions on tax are as follows.

The LLP Income Tax

Thus, s. 10 of the LLP Act adds a new section 118Z to the Income and Corporation Taxes Act 1988, providing that a trade, profession or business carried on by an LLP with a view to profit is to be treated for tax purposes as being carried on in partnership by its members and not by the LLP as such. The property of the LLP is to be treated for tax purposes as partnership property. An LLP which meets the test of operating as a trade, profession or business with a view to profit will, therefore, be transparent for tax purposes: like partners, the members will be individually liable to tax on their shares of the profits earned by the partnership.

The Capital Gains

A new clause (s. 59A) is added to s. 59 of the Taxation of Chargeable Gains Act 1992. This provides that, where an LLP carries on a trade or business with a view to profit, assets held by the LLP are to be treated for the purposes of chargeable gains tax as being held by its members as partners, and any dealings by the LLP are to be treated likewise as dealings by the members in practice. Tax in respect of chargeable gains accruing to the members of the LLP on the disposal of any of its assets is to be assessed and charged on each of them separately. Any acquisition or disposal of assets will not be treated as being made by the LLP itself.

The Inheritance Tax

A new s. 267A is inserted into the Inheritance Tax Act 1984. This makes clear that, for inheritance tax purposes, the property of the LLP is to be treated as the property of the partners and that the formation, change in membership and dissolution of an LLP are to be treated as the formation, change in membership or dissolution of a partnership. Business relief will be available on that basis. Any transfer of value made by or to an LLP is to be treated as made by or to its members in partnership.

The Stamp Duty

Stamp duty is not chargeable on a transfer of property by a person to an LLP within one year of its incorporation provided that, immediately before incorporation, two conditions are satisfied. The first condition is that the person making the transfer is either a partner in a partnership which comprises all the persons who are to become members of the LLP (and no one else); or a person who holds the property transferred as nominee or bare trustee for one or more of the partners in that partnership.

The second condition is that: the members' entitlements to the property is to be the same as their entitlements to it in the partnership; or no difference in the entitlements arises as part of a scheme of which the main or one of the main purposes is to avoid tax.

The National Insurance

Where income tax is chargeable on a member of an LLP in respect of profits or gains arising from the carrying on of a trade or profession by the LLP, Class 4 contributions are payable by that member.


The above paragraphs outline the main statutory provisions on tax in the LLP Act. Further legislation was planned in the Finance Bill 2001 to address the approach to be taken with respect to the taxation of types of businesses, including investment businesses, which might be motivated to adopt the LLP structure for purely tax reasons rather than to obtain limited liability.

Capital allowances - where an LLP succeeds to a business previously carried on by a partnership, this will not in itself give rise to a balancing event for the purposes of the Capital Allowance rules.

Cessation - where an LLP succeeds to a business previously carried on by an old partnership, this will not in itself involve the cessation of the old partnership's trade or profession.

Partnership annuities - where an obligation to pay an annuity's transferred from a partnership to an LLP, the members of the LLP will be entitled to higher rate income tax relief for their share of ongoing payments. Incoming members who assume part of this obligation will also be entitled to such relief.

Capital gains: partners' interests - so long as the LLP carries on a trade or profession with a view to profit, a Partner's capital interest as a member of the LLP will not be regarded as a chargeable asset in its own right. Members of the LLP will be directly taxable on their share of the LLP's assets.

Ceasing to trade - where an LLP ceases to carry on a trade or profession it will no longer be regarded as a "partnership" for tax purposes and will instead be regarded as a "body corporate". The LLP will then cease to be "transparent". Where an LLP goes into liquidation, chargeable gains on the disposal of the LLP's assets by the liquidator will be computed by reference to the date on which they were first acquired by the LLP and their cost at that date. During the winding up itself, the LLP's capital gains will be treated in the same way as any other body corporate.