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My client intends to acquire land to develop residential property in the UK with a view to selling it for a profit.
A requirement of the lending bank is that the vehicle to undertake the trade is a UK company limited by shares. The UK company will have two shareholders: a third party and my client’s non-UK resident investors, through a limited liability partnership (LLP).
I understand that the UK company will be subject to UK corporation tax, but I am not sure about the tax implications of the LLP as a result of its shareholding in the UK company. I understand that the directors of the UK company will declare dividends to shareholders, who will realise their investment. Because the LLP is tax transparent, the distribution may be treated as disregarded savings and investment income under ITA 2007, s 813, with the dividend assessed on each LLP member in their relevant jurisdiction.
However, I am uncertain whether an LLP which holds shares in a trading company would be deemed to be ‘carrying on a trade, profession or business with a view to profit’ and whether the tax transparency of the LLP would be maintained. An overview of the LLP’s tax and tax filing obligations in the UK would also be appreciated from readers.
Query 19,844 – LLPlease.
The LLP, as a body corporate, should be regarded as carrying on a business.
An LLP is normally ‘transparent’ for tax purposes if it carries on a trade, profession or business with a view to profit (ITTOIA 2005, s 863). All activities of the LLP are then treated as activities of its members and its property – in this case, the shares held by the LLP – is treated as property of its members.
The LLP here is not carrying on any trade or profession, but does the holding of shares in expectation of receipt of dividends constitute a business? In American Leaf Blending Co v Director General of Inland Revenue [1978] STC 561, Lord Diplock indicated that, in the case of a limited company, ‘any gainful use to which a company puts any of its assets prima facie amounts to the carrying on of a business’ and specifically ‘a company may carry on business as an investment or holding company deriving its gains or profits from dividends and interest from the securities it owns.’ On this basis, the LLP as a body corporate, should be regarded as carrying on a business.
Accordingly, dividends of the LLP would be treated as dividends of its members. Since the members are non-resident, there will be no income tax payable on the dividends, no withholding tax being due on dividends in the UK. The LLP will be required to register with HMRC by completing form SA400, and each member will be required to complete form SA401 (individuals) or SA402 (companies). HMRC may then issue tax returns for completion by the LLP and its members.
It is noted that income distributions will be made by dividend, but consideration should also be given to the possibility that capital distributions might be made on a winding up, or that the LLP might dispose of shares in the limited company. Capital gains of non-UK residents are subject to capital gains tax if they accrue from UK land or assets deriving at least 75% of their value from land (TCGA 1992, s 1A(3)). Tracing through the LLP, each members’ shares will fall within this definition and will be subject to tax. The members will be required to report the disposal to HMRC within 60 days of completion and pay the tax due. – Mr B.
Would direct investment in the company be better than an LLP?
An LLP is tax transparent if, and for so long as, it carries on a trade, profession or business with a view to profit. Holding shares is an investment business so long as the investments are held with the reasonable intention of generating a profitable investment return (whether by dividends, gain on sale or a combination thereof).
The LLP will have the normal accounting and tax return obligations, which unfortunately means keeping accounting records, preparing accounts annually and submitting them to Companies House, and preparing an LLP tax return – potentially with up to four different profits calculations depending on the nature and location of its members.
What is less clear to me is why the client needs the LLP given that it will only hold shares in a company. Direct investment in the company with an appropriate share structure and shareholders’ agreement should let the client allocate dividends between themselves as they wish and avoid the administrative burden of maintaining the LLP.
If the client does want to proceed with an LLP, then LLPlease should take care to review whether the LLP will fall within the scope of Financial Services and Markets Act (FSMA) 2000, s 235 and is therefore be considered a collective investment scheme (CIS) by the Financial Conduct Authority (FCA). Any ‘operator’ of a CIS must be properly authorised by the FCA and the FSMA restrictions on financial promotions must be respected before inviting anyone to join an LLP that is a CIS.
The CIS rules are very broadly drafted and the penalties for breaching FSMA 2000 can be draconian.
To be a CIS an LLP must undertake ‘any arrangement with respect to property of any description, the purpose or effect of which is to enable persons taking part in the arrangements to receive profits or income arising from the property in the scheme’ and have the characteristic of either ‘(a) a pooling of the contributions of the investors, or the income out of which payments are to be made to investors; and/or (b) the management as a whole of the property by or on behalf of the operator of the scheme’. The LLP sounds as though it will be caught unless the ‘investors’ (in other words, the members) have day-to-day control over the management of the ‘property’, in this case the shares. – Andy Tall.
