UK Limited Liability Partnerships and Taxation

Limited Liability Partnerships and Taxation

Introduction

UK Limited Liability Partnerships were first introduced to UK and non UK residents in 2001. A limited liability partnership (LLP) is formed under the Limited Liability Partnerships Act (LLPA) 2000.  A LLP is similar to a partnership, but the main difference is only the LLP itself is liable for the debts of the partnership.

The LLP must be registered at Companies House and is obliged to produce and file annual financial statements.  The rules regarding accounts and audit are similar to those that apply to private limited companies.

A LLP is given separate legal personality by LLPA 2000 and must have at least two, formally appointed, designated members (partners) at all times.  The minimum capital contribution is £ 2.

Formation

A UK LLP with your choice of available name can be formed by us with Companies House and is a straightforward process.  These can be formed same day if required.

Form LL IN01 Application for the Incorporation confirms the following

– the name of the limited liability partnership:
– the address of the registered office
– the names and addresses of each of the corporations or individuals who are the first members of the LLP on the establishment.
– the designated members must be confirmed. The designated members are persons responsible for the statutory compliance of the LLP and need to be a minimum of two.
– a compliance statement signed by a solicitor or first member confirming that the LLP is being established to carry on a lawful business with a view to profit.

We recommend that the LLP partners (members) prepare and sign a partnership agreement agreed amongst them which clearly demonstrates the profit sharing, LLP UK management or other arrangements otherwise verbally contracted between the members. This agreement does not have to be filed with Companies House or available to the general public.  There is also no requirement to hold and maintain records of meetings.

The advantages for non-residents of forming a UK LLP are that they offer the business flexibility and ability to separate out different rights for different members.  Different voting rights can be given to certain classes of members such as new members, retiring members etc, as compared to income rights. All these matters are easily dealt with in the partnership agreement.

Restrictions on Trading

There are restrictions on the type of trade that a LLP can carry out within specified categories, which include banking, insurance, financial services, consumer credit related services and employment agencies.

Transfer of Member’s Interest

Membership interests are not the same as shares in a limited company and some of the advantages of having readily transferable shares can be lost.

Selling ‘membership interests’ is not as straightforward as a share sale and the LLP cannot be listed and therefore easily marketable. However, the business and assets of the LLP could be sold to a third party and the profits paid to members in accordance with the LLP agreement.

A member’s interest in an LLP can be transferred to another person/corporate entity at any time.

It is important that member’s put an agreement in place that details the financial position should a member die.  A member’s estate will not have an automatic right to payment of the member’s capital or a share in the surplus value of the LLP’s assets.

Taxation

For UK tax purposes, a LLP is fiscally transparent where each partner will be assessed to tax on their share of the LLP’s income or gains as if they were partners of a ‘normal’ partnership.

Provided that no business or trade is carried out with or within the United Kingdom and the partners are located outside of the UK then UK LLPs have no liability for UK taxation. This is because the limited liability partnership itself will not be liable for taxation on profits or gains, the profits or gains of the partnership will be assessed to tax separately on the individual partners. If these are located outside the UK then no UK tax is payable.

There is no requirement for a UK LLP to have a United Kingdom partner and no taxation should arise on non-resident partners on income from a UK LLP where the business of that LLP is managed, controlled and carried out outside the United Kingdom.

Advantages for Non-Residents

A UK LLP incorporation is not restricted to UK residents only and means that for non-residents can also register this type of partnership.

Non-resident partners are only liable to tax on profits and their share of partnership investment income to the extent that it arises in the UK.  A corporate non-resident partner will be liable for overseas profits which relate to a UK permanent establishment, and their share of partnership investment income.

UK resident partners are liable to UK tax on their share of the worldwide profits of the partnership. However, where a partnership is managed and controlled abroad, UK resident partners may be entitled to be taxed on the remittance basis for their share of the profits that arise overseas.

The following criteria must be met to ensure that a UK LLP will minimise its chance of not being liable to any taxes:

  1. The individual members have to be non-UK residents
  2. Control of the LLP (i.e. decision making, board meetings, signing of contracts etc) should be exercised overseas
  3. A UK LLP with foreign partners (UK non-resident members) will only pay UK personal income tax on the profits gained from trade within the UK. The members may also take advantage of more than 100 double taxation treaties signed by the UK (see below).

Other advantages are that personal assets of members are protected the same as a limited company in UK, and furthermore, a LLP is a British legal entity and respected worldwide.

Non-UK residents and non-domiciles are best positioned to minimise UK tax through use of offshore companies with the UK LLP or UK company as part of the business structure. UK LLP formation is straight forward.

Double Taxation Conventions

The United Kingdom is party to more double taxation treaties than any other sovereign state. However, access to treaty benefits for UK LLPs is determined by the residence of members.The legal standing of an LLP can present challenges with regard to some double taxation arrangements. Recently, the UK has also entered into many tax information exchange agreements (TIEAs).

Copies of double taxation conventions published from 1997 onwards can be found on the UK Legislation website.  It is worthwhile to note that all the following countries have signed double taxation treaties with the UK:

Russian Federation – Statutory Instrument 1994 No. 3213 

Ukraine – Statutory Instrument 1993 No. 1803

Georgia – Statutory Instruments 2004 No. 3325 and 2010 No. 2972

Kazakhstan – Statutory Instruments 1994 No. 3211 and 1998 No. 2567

Opportunities for foreigners to invest

There are no restrictions on foreign persons investing in UK assets, such as stocks and shares, land or depositing money with UK banks etc.

UK corporation tax, or income tax and capital gains tax (CGT), is imposed on any income or gains that are effectively connected with a trade that a non UK resident company or individual conducts through a permanent establishment in the UK.

The UK has no dividend withholding tax.

UK income tax is imposed on rental income from property situated in the UK (see below).

No UK tax is imposed on bank interest and interest received on government securities.

Withholding tax may be imposed at the 20% rate or, if there is an applicable double tax treaty, at the treaty rate on payments of other annual interest.

Gifts or bequests of UK assets owned by non-resident individuals are within the scope of inheritance tax.

UK property and LLPs

The holding of a property investment through a traditional limited company usually results in a double tax charge on disposal of the asset as the company pays tax at a corporate level, and then the directors/shareholders face further tax following extraction of the proceeds either via a dividend, salary or bonus.

A more tax-efficient way of holding property is through a UK LLP where individual partners can take advantage of CGT rates at 18% on the future growth. Overall, therefore, the benefits of using an LLP to hold new investment properties are:

  • Tax transparent i.e. avoids double tax charge to income and gains
  • Enables investors to benefit from lower CGT rates
  • Flexible in respect of investors’ income and capital shares
  • Offers similar protection to that of a company.

Specifically, if the LLP is structured so that it has both a corporate member and individual members, this gives the ability to allocate income and capital rights more tax efficiently. For example, income rights can continue to be allocated to the investment company and capital rights on future growth can be allocated to individuals (and trusts).

HM Revenue & Customs (HMRC) confirm that where you are not resident in the UK, whether you pay CGT on UK assets will depend on a number of factors:

  • if you have previously lived in the UK, and if so, when you left the UK, the period of time you were resident in the UK before your departure and the length of time you live abroad
  • whether you are still ordinarily resident in the UK – that is, your normal home is the UK
  • whether the assets are held for the purpose of carrying out work through a UK branch or agency

In general, you will not be liable to pay tax on capital gains if you are not resident in the UK.

Turning to rental income from UK property, income tax is payable on rental profits (after deduction of interest) and this applies even if you are non-resident and still receive rental income from the UK. This type of income is dealt with by the HMRC Non-Resident Landlord Scheme. The scheme requires either a property’s tenant or the LLP’s letting agent to deduct basic rate tax from the rental income they pay to the overseas member if their usual home is outside the UK.

Conclusion 

A UK LLP can be used as a respectable vehicle for international trade whilst enjoying a Nil or low rate of taxation.

Non-UK residents, as well as non-domiciles, are potentially best positioned to minimise UK tax through the use of a UK Limited Liability Partnership. It is a “pass through” entity from a UK tax perspective; therefore income is attributed to individual partners personally. A UK LLP with foreign partners (i.e. non-UK residents) and no profits derived from the trade in the UK will not be subject to UK personal income tax on the profits.

And finally, an administrative advantage is that where a UK LLP has all of its activities outside the UK, there is no requirement for the partnership or its non-resident members to register with HMRC for partnership taxation, National Insurance or self-assessment.

Justin Seers, Business Atrium

Posted in Talking and tagged , , , , , .

One Comment

  1. Hello there, I hope you can clarify a couple of points for me: I am a non-UK resident working online for a UK based company (testing and editing web content). I would like to start an LLP with another non-UK resident, this is in order to simplify all tax issues and claim any eligible business expenses.
    1) Does my involvement with a UK company make me or the LLP liable for UK taxes and/or NIC contributions?
    2) Am I correct in assuming that any eligible business expenses would be dealt with by the LLP before any taxable profit is due?
    3) Would the inclusion of a 3rd member (UK resident – non-designated) change the tax jurisdiction?
    Many thanks in advance

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