Structuring property investments through Limited Liability Partnerships
Historically, property investment has been structured through the use of a Limited Liability company because of the attraction of limited liability in the context of a geared property activity. However, using the corporate structure to hold investment properties will result in a double tax charge on disposal of the property and a subsequent extraction of the proceeds by either dividend or bonus. The overall effective tax rate will be approximately 46%.
By holding investment properties through a Limited Liability Partnership (LLP), individual shareholders can take advantage of Capital Gains Tax (CGT) rates at 18% on the future growth. Overall therefore, the benefits of using a 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 and;
• 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 taxed at 22-28% and capital rights on future growth can be allocated to individuals (and trusts) and taxed at 18%.
For each £1 million in increase in value, this could result in a tax saving of around £280,000. There are other general benefits of using LLP which are:
• It allows investors to participate using a private legal agreement;
• Future growth in value of land can be taken outside the confines of the structure of a company;
• Non-resident individuals could avoid paying any tax on capital gains;
• Individual members of the LLP are self employed and therefore there is no employers’ NIC on profit allocations;
• Capital growth can be diverted into the estate of the next generation if the individual’s interests are held through trusts.
As mentioned above, the LLP is transparent for tax purposes and is deemed to be a partnership as if the business is carried on directly by the members themselves. Thus rental profits, net of interest will be taxed on the individual members under Schedule A at the member’s marginal rate. The income will be assessed on the individual members whether it is distributed to them or not. Therefore, where profits are significant and are likely to be retained for future investment, it is worth considering the use of a corporate member for this purpose. Profits will be assessed on the company at a maximum rate of 28%. It is also possible to offset capital allowances, interest on loans and other expenses against the income of the partnership in the normal way. In conclusion therefore, we would suggest that consideration is given to new property investment businesses being structured through an LLP where either existing property investments are being acquired or land and buildings are being developed
for retention as investment properties. There are, as always, issues that need to be considered such as Stamp Duty Land Tax and CGT on the transfer of existing properties to the LLP, but it maybe that the
current depressed values of property and appropriate planning can avoid any charges.
Growth by acquisition
Many businesses are finding that increasing marketing efforts and cutting costs is just not enough to counter a continuing decline in revenues.
One approach that we believe should be seriously considered ismaking a strategic acquisition. Businessesmay have discounted an acquisition as being too costly or too risky given current economic conditions but this need not be the case.Withmany businesses struggling, their value will have dropped significantly and in some cases a sale ormergermay be the only way they will survive. The consideration paid for
a business can be structured to reduce risk and immediate cash outlay.
Methods commonly used are:
• Deferred consideration – here consideration is fixed but paid over a number of years.
• Contingent consideration – here consideration is variable and only paid if certain performance criteria are met.
Article provided by Menzies