Changing the structure of the business into a limited liability partnership can have many benefits for the property investor or small business.
A recent survey confirmed that over 90% of small businesses have not restructured their business since inception.
An LLP in reality is just a partnership that provides the partners involved with the benefits of limited liability. In this way the personal assets belonging to the partners are ring fenced from potential business creditors.
There are a range of financial benefits of limited liability partnerships which can be very useful for small businesses and property investors. It seems that LLP’s are under utilised because they are not understood properly.
Taxation Benefits
Entrepreneur’s should remember that their business structure can have a significant effect on the commercial, financial and taxation future of the business. LLPS are considered “transparent” for tax purposes meaning that the partners are assessed individually on their tax share of the LLP’s income or gains. The main trade off for tax benefits are that the company will have to file some information on public record, but LLP’s also protect the business owner more.
Property investors using joint ventures, or entrepreneurs who possess a range of business investments they may not necessarily want in the same group, can benefit because each registered partner is taxed on the income they derive from the LLP as trading income. It should be noted that an LLP is a separate legal entity purely in legal terms.
Interest Relief On Loans
If an LLP “carries on a trade” the individual partners are entitled to claim interest relief any loans obtained and used to purchase a share in the partnership. The rules say that you must remain a partner to the date of the payment of the interest and must not recover capital from the partnership.
For property investors it should be noted that an LLP used as an investment business gains no interest relief. Interest relief is claimed on the self assessment return and a mortgage can be used for this purpose.
Capital Gains Tax & Taper Relief
Taper relief is the main relief for partners. When 2 years old, the partnership qualifies for business asset taper relief which in turn reduces the capital gain by 75%. Effectively this gives a CGT rate of 10% for a higher rate taxpayer.
Investment business taper relief is different though, and would be at the lower non business asset rate. CGT rates then rise to 24% after ten years ownership. Sale of the partnership within three years would negate any taper relief. Instead there would then be a graduated scale up to the maximum ten years of ownership.
Rollover relief and gift relief for LLP’s is also a possibility.
Inheritance Tax Benefits & BPR
Trading partnerships have the added benefit for the members in that interest in this qualifies for business property relief (BPR). BPR is an effective tool to eliminate the value of the partnership interest from the deceased’s estate.
Beware though, that personally owned land or buildings which are used by a partnership reduces the rate of BPR to 50%. Considering tranfserring the land to a discetionary trust if the IHT charge is expected to be large.
LLP’s offer a good midway point between a partnership and a Ltd company and can be very useful.If you would like tax planning advice please contact us and we will put you in touch with a regulated professional.
