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Tax Planning Involving Use of LLP and Limited Company

Tax Planning Involving Use of LLP and Limited...

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Does anyone know of any tax planning schemes involving the use of both an LLP and limited company? As far as I can determine the structure is something along the lines of :

i) the business trades through an LLP,
ii) one of the partners in the LLP is a limited company in which the major shareholder is the owner of the business,
iii) the LLP makes no profit for tax income tax purposes because the limited company member levies a management charge on it taking the profits out of the LLP and into the limited company where they are taxed at corporate tax rates,
iv) under the terms of its shareholding, the limited company is required to make some form of capital contributions to the LLP e.g. loans etc,
v) the unincorporated partner (owner) then draws the funds down from the LLP as drawings on their capital / current account without paying any income tax.

I apologise if this has been posted before or if I have not described the structure properly. The scheme was described briefly to me by a client who did not fully understand it (he got the information from a friend who had been advised by his accountants to do this and it was going to save a fortune in tax etc.etc .......).

I said I would check it out but I am not aware of the scheme and I can see problems justifying the payments under iv) above and problems with disgusied income etc.

Any thoughts or opinions would be much appreciated.

Thanks

Replies (6)

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Nichola Ross Martin
By Nichola Ross Martin
13th Apr 2011 12:39

There are schemes and there are schemes

Running a partnership in tandem with a company is just one way to structure a business and is "as old as the hills" - well not quite, but fairly common amongst professional firms.

The advantage of using a partnership is no employment related securities when partners come and go and no tax on benefits, when you make super profits it may be cheaper to be a partner, the chief disadvantage apart from the need to keep separate records and account for it all is that you may pay NICs on partnership profits and there are restrictions on your annual investment allowances. There are complications where the partnership owns property and recognises its goodwill.

A limited partner does pay tax on its profits. The idea is that it can shelter profits from higher rates and NICs. You need to tread quite carefully with regard to transfer of income anti-avoidance (not usually an issue but I flag it up as you are talking about "schemes" though).

Any "scheme" involving loans requires great care - if the company makes loans to the participators there is a possibility of a s459 CTA 2010 tax charge although it might be probable that the type of scheme that you are talking about is just an arrangement to incorporate part of a partnership business and then draw down the resultant directors' loan account.

As far as disguised income goes then one would really need to examine the small print of any proposal in view of the 2011 measures.

In short, there is more than one way to skin this particular cat, my chief observation is that in trying to save tax you end up with an overly complicated structure. Happy to chat it over with you.

Virtual tax support for accountants:www.rossmartin.co.uk

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By andrewdiver
18th Apr 2011 12:34

Current / capital account

From the transactions you have indicated I cannot see how you have created additional funds within capital account/current account available for distribution.  Unless you are looking to release exisiting capital.

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By Axelsen
19th Apr 2011 11:03

LLP tax planning

I have been looking into this for a potential client who has been advised by a top 10 firm to do this.

I do not believe the scheme works because where the individual draws money from the partnership this will mean that the ltd co cannot be fully paid its profit share. As such there is a loan from the company to the partnership.

In normal circumstances HMRC would not treat this as covered by S419 but CIM61515 suggests that it may be particularly where there is a loan from the partnership to the individual. Clearly if the individual has no profit share but has drawn then his capital account will be overdrawn.

 

In addition the company will need to consider whether to provide for the possibilty that it will not receive its profit share and or whether the value of their investment in the LLP needs to be written down.

 

The prospective client was also advised that if the partnership failed that he would not have to repay his oversrawn accout, again incorrect in my view

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By ces.hlb
20th Apr 2011 15:22

Associated companies

Another alternative that I have been looking at is where each of the senior partners in an LLP sets up his own company, which will also become a member of the LLP. The original partner will take a small reduced share of profits and his company will receive the balance of his share of profits.

My query is whether these companies will all be treated as associated with one another for small companies rate, as they will be controlled by fellow partners. Would this arrangement constitute "relevant tax planning arrangements"? The companies would certainly have substantial commercial interdependence with one another under the new rules, as they would be in partnership in the same business.

Would it be any different if each of the senior partners sold the whole of their share in the LLP to their own companies and the individuals ceased to be partners immediately before the companies joined the LLP?

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Paul
By pdh666
09th Jul 2012 09:42

Update

In response to the original comment made by Axelsen in regard to an LLP owing monies to a Ltd company, where the structure involves one person who is a member of the LLP and sole director of the Ltd company, and the Ltd company is a member of the LLP.

 

Does anyone have any comments regarding the potential s455 charge on the loan account balance in the company?

 

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By frankwbx
23rd Jul 2013 23:28

Ref Gibraltar
Here is a complex question. If a company registered in Gibraltar was a partner in an LLP and that company xyz ltd was owned by Mr A 100% and the company as the partner was owned 1% by the individual and 99% by the Gib company xyz ltd would that be a legal arrangement???

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