LLP & Further Tax Issues

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 of a limited liability partnership will be individually liable to tax on their shares of the profits earned by the LLP.

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.

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.

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.

Tax transparency: the fees earned by the management limited liability partnership will accrue directly to its members, in the same way as they would in an ordinary partnership. That compares to a management company, which pays tax on its profits. However, a limited liability partnership cannot be in a group with other companies for the purposes of loss relief and capital gains tax so that, for example, excess management expenses of a corporate general partner cannot be surrendered to it.

National insurance (does not apply to non-UK based members): the national insurance position of members of a limited liability partnership is the same as that of partners in an ordinary partnership. The members themselves will pay class two and four national insurance contributions which will amount to approximately £2,200 a year, together with the 1% surcharge on profits introduced in 2003.

As the members of a limited liability partnership are, strictly speaking, self-employed, there will be no obligation on the limited liability partnership to pay employer's national insurance contributions on such amounts, only on the amounts of the payments to employees of the limited liability partnership. A company would have to pay national insurance contributions at the rate of 12.8% on the value of the employees' salary/benefits.