Limited Liability Partnership “LLP” LANDLORDS’ CASE STUDYMake Text Bigger
Bob and his brother Richard own six rental properties in a Limited Company, another six in joint ownership and three each in their sole names. Richard owns another three properties jointly with his two sons, two jointly with his wife and another jointly with his mother. Bob owns two further properties with each of his daughters, another two jointly with his father and four more jointly with his wife.
In total that’s 10 individuals across three generations of one family, plus a limited company, owning 34 properties between them.
As of April 2019, between the 10 individuals they can receive £500,000 of taxable income before they become higher rate tax-payers. However, the current basis of ownership doesn’t allow for profits to be allocated in that way.
The problem is that Bob and Richard have taxable income well into the higher rate tax bracket whilst the others have plenty of ‘headroom’ as basic rate tax-payers. This means that Bob and Richard are paying 40% tax on a proportion of their rental income and are also suffering the phased impact of finance cost relief for individual landlords.
All of the family members decide to pool their resources by forming a Limited Liability Partnership “LLP”.
Each of them starts with a positive capital account balance, which is the value of their net equity in their properties (i.e. value minus mortgage balance).
They then agree to “allocate” profits disproportionately to ownership. this doesn’t affect what each of them withdraw from the business, but it does affect their tax position to the extent that none of them will be pushed into the higher rate tax band, even after the restrictions on finance cost relief are fully phased in.
One of the most power tax planning opportunities associated with partnership is the ability for the partners to agree to allocate profits disproportionately to ownership, and to take drawings out of the business disproportionately to profit allocation.
Bob and Richard agree to allocate far less of the partnership profit to themselves than they had previously taken. However, they continued to withdraw the same amount as they had always done to this business. Over a period of time this results in the value of their capital accounts decreasing – which is good news for IHT purposes and its also good news for them because they pay less tax. They are now unaffected by Section 24.
To balance this, the youngest generation do exactly the opposite. Their profit allocation is significantly higher than they would have previously taken, but still within the basic rate tax band. Their drawings from the business were much lower though, save for the increased amount of tax they now pay on the higher amount of allocated profits. This results in the younger generations capital accounts growing in value by the amount of profit they are retaining in their capital accounts.
The family are all happy with this because:-
- Between them they pay significantly less tax
- None of them are any worse of in terms of actual spending power
- The younger generation have larger income to show to mortgage lenders when buying their next home
- The value of the estate is reducing for the elder generation, which is good for IHT purposes
- The younger generation will pay less IHT when the elder generation pass away
- All of the tax is paid by the business and debited from the value of each members capital account
- The younger generation had always intended to retain profits anyway, because they want to grow the business
- Any combination of up to four members can now purchase further properties and hold them ‘on-trust’ for the partnership
This structure works particularly well for families who own rental properties in a variety of combinations, and particularly when their incomes fall into different tax bands.
The costs of forming such partnerships are relatively low too. This is because LLP’s are tax transparent. This means that Members of the partnership can hold assets ‘on-trust’ for the partnership. This flexibility goes some way to explain why most Solicitors practices these days are LLP’s. Also, it isn’t possible for more than four partners to be registered legal owners or on a mortgage deed either.
So what about CGT, Stamp Duty and refinancing when the properties are transferred into the LLP?
This is another beautiful quirk of the LLP structure. Because they are tax transparent, and members can hold properties ‘on-trust’ for the LLP, there is no need to transfer the ownership. Therefore, there is no conveyancing, no need to refinance and no CGT or Stamp Duty to pay because the ownership of the assets never actually needs to be transferred.
The costs associated with taking proper legal advice and having all the correct documentation professionally drafted to set up up arrangements like this are much less than you might think too. Quotes we have obtained from Cotswold Barristers range from £4,995 to £9,995 + VAT, depending on the number of partners/members and properties involved.
The starting point is a consultation with a consultant from Property118 Limited, which is priced at a fixed fee of £400 inclusive of VAT and comes with a guarantee of total satisfaction or a full refund.Show Form To Book A Tax Planning Consultation