The majority of property investors in the UK either act as “private landlords” or as companies. In certain instances, a limited liability partnership (LLP) may prove to be a superior or additional organisational structure. In this article, LLP for property investment, we take a look at the process involved and the options available to you.
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For a free initial discussion with a member of our New Enquiries Team, get in touch with us today. We are experienced in dealing with all the legal aspects of LLP formation for property investment, and once instructed, we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you are on the best possible footing from the start and also avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
What is The Importance Of A Beneficial Interest Of Trust?
The purpose of a Beneficial Interest Transfer Agreement “B.I.T.A.” is to legally document the transfer of beneficial interest in property(ies) held by one or more individuals to a Limited Liability Partnership “LLP.”
The Agreement will specify the following for each property to be held ‘in trust’ for the LLP:
- Address of the property
- Market value at the time of transfer
- Outstanding financial liabilities
The value of the equity contributed by each member will be reflected in their opening capital balances. As LLPs are tax transparent, there are no CGT or Stamp Duty implications until the ownership structure is changed in a manner that is disproportionate to the opening capital account balances. Legal ownership and contracts between borrowers and mortgage lenders are unaffected.
The members of the partnership hold the properties “in trust” for the limited liability partnership. Members of an LLP may continue to apply for financing against LLP properties held in their own names, but any net proceeds of refinancing go to the LLP or are otherwise treated as “drawings” from the members’ capital account. Members will receive a part of the income or profit proportional to their capital account balance. Nonetheless, disproportionate division of profit may be accomplished by assigning select members a “partners wage” in respect of their work, which may be disproportionate to their income/profit share. For instance, a new member may contribute little to no stock but assume a major portion of the business’ administration.
The Advantages Of Using An LLP For Property Investment
Individual landlords may not qualify as businesses in their own right for incorporation relief purposes. However, as a result of combining their resources through the formation of an LLP, their eligibility for incorporation reliefs becomes uncontested. Similarly, when a partnership transfers a “whole company” into a Limited Company, relief is provided to lessen Stamp Duty Land Tax (SDLT).
As you might anticipate, HMRC has anti-avoidance rules to prevent landlords from abusing the tax system by forming LLPs solely to avoid tax at the time of incorporation. These provisions are referred to as “GAAR” (General Anti Abuse Rules). As an illustration of how GAAR affects SDLT relief in England, Section 75a of the Finance Act 2003 states that applications for Stamp Duty relief may be disregarded if made within three years of a partnership’s formation.
Where ‘taxable rental earnings’ and other taxable income from all sources exceed an average of £50,000 per owner, a Limited Company is typically a more tax-efficient entity than an LLP. However, an LLP is frequently utilised as a “stepping-stone” technique in the absence of a partnership. This is especially true when mortgage debt is much smaller than the original acquisition expenses of the property portfolio as a whole, due to the fact that there is an additional chance to consider Capital Account Restructuring as part of the tax planning procedure. In addition, Limited Companies offer extra Inheritance Tax “IHT” planning alternatives in the shape of Freezer Shares to cap the value of shares for the older generation and to accumulate future share value increase for the younger generation of the family. Particularly advantageous is the usage of a limited liability partnership (LLP) in a family where each member holds property in their own name, but a different income split would be advantageous from a tax standpoint.
A further advantage of the LLP form is that it is a separate legal entity, similar to a limited company. Even if there is only one property, it cannot be maintained that a Limited Liability Partnership is not a business.
It can be seen, therefore that a limited liability partnership (LLP) can be utilised for a property business and offers advantages over sole proprietorships and limited companies. A limited liability limited partnership (LLP) in property investment combines the security of limited liability with the flexibility of profit distribution.
What Is The Tax position?
A limited liability partnership is transparent for tax purposes.
This means that the individual partners are considered to be self-employed and are required to pay income tax on their share of the earnings as well as Class 2 and Class 4 National Insurance contributions, if applicable.
When a property is sold at a profit, the individual partners must pay capital gains tax on their proportionate share of the profit. Each partner is required to report their income from the LLP on their individual tax return. The LLP must file a return as a partnership.
Importantly, the LLP must be operated with a profit motive, as anti-avoidance provisions may apply and have the effect of switching off tax transparency.
What Happens To Capital Gains Tax, Stamp Duty, And Refinancing When The Properties Are Transferred To The LLP?
This is yet another attractive feature of the LLP structure. There is no need to transfer the ownership because LLPs are tax transparent and members may hold properties “in trust” for the LLP. As a result, there is no conveyancing, no need to refinance, and no CGT or Stamp Duty to pay, as the assets’ ownership need never be changed.
How we can help
We have a proven track record of helping clients deal with the process involved in setting up an LLP for property investment. We will guide you diligently and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to Contact Our Corporate Solicitors
It is important for you to be well informed about the issues and possible implications of creating an LLP for property investment. However, expert legal support is crucial in terms of ensuring your business is set up correctly.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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