Guide for landlords on forming an LLP for property investment
Make Text Bigger
The purpose of this article is to explain the correct process for landlords to transfer existing properties into an LLP, and some of the main advantages of doing so.
A Beneficial Interest Transfer Agreement “B.I.T.A” serves to legally document the transfer of beneficial interest in property(ies) held by one or more individuals into a Limited Liability Partnership “LLP”.
The Agreement will show the following for each property to be held ‘on-trust’ for the LLP:-
market value at the point of transfer
opening capital account balance for each Member (share of assets minus share of liabilities held ‘on trust’ for the LLP)
The value of the equity introduced by each member will be reflected in their individual opening capital account balances.
LLP’s are tax transparent, so there are no CGT or Stamp Duty implications unless the ownership structure is amended disproportionately to the opening capital account balances.
Legal ownership and contracts between borrower(s) and mortgage lender(s) remains unchanged.
The members of the partnership are holding the properties ‘on-trust’ for the LLP.
Members of an LLP may continue to make finance applications against LLP properties held in their own names, but any net proceeds of refinancing belong to the LLP or are otherwise treated as ‘drawings’ from the members capital account.
Members will receive an income/profit share proportionate to their capital account balance. However, disproportionate allocation of profit may be achieved by allocating certain members a ‘partners salary’ in recognition of the work they do, which could be disproportionate to their income/profit share. For example, a new member may contribute little or no equity but take on a significant share of the management of the business.
Each members profit is taxed as self-employed income. If that income exceeds £5,965 per annum they will be compelled to pay Class 2 National Insurance at £2.85 per week. However, Class 4 National Insurance is only payable if the business also engages in a trade. Property Investment alone is not a trade but is a business. As members are technically self-employed the LLP does not pay employers National Insurance, even on ‘partners salaries’
This structure is particularly advantageous where a group of individuals and/or companies wish to group together to form one business, perhaps in order to share resources, risks, experience and availability of time. There are other advantages too, as follows:-
Legacy Planning – Case Study
A family of four pool their rental property resources and experience to form an LLP. For the purposes of this exercise we will assume the members are Mum, Dad, Son and Daughter. The opening capital account balances might result in an income/profit share of 40% each to Mum and Dad and 10% each to Son and Daughter, based on the amount of equity each of them introduced into the LLP.
Now let’s assume that the ‘taxable profits’ of the business are £200,000.
Ordinarily, Mum and Dad would receive £80,000 each. As of 6th April 2019 the first £12,500 would fall within their nil rate band, the next £37,500 would fall into the 20% basic rate tax band and remaining £30,000 would be subject to higher rate tax and also trigger further tax based on the restrictions on finance cost relief to the basic rate of tax. Son and Daughter then each receive profit allocation of £20,000 each.
However, given that Son and daughter do most of the work it is agreed that Mum and Dad will allocate each of them a ‘partners salary’ of £37,500. The remaining £125,000 of profits are then allocated in accordance with profit share. In other words, Mum and Dad each receive their 40% of £125,000 which equates to £50,000 each and Son and Daughter each receive their further 10% of £125,000 which equates to £12,500 each. The outcome is that none of them are higher rate tax-payers because they all have a taxable income of £50,000. This also means they become unaffected by the restrictions on finance cost relief.
Taking this a stage further, it could also be agreed that Mum and Dad may take drawings from the business which exceeds their profit share. This is perfectly acceptable because they are withdrawing their own capital. This would result in their capital account balances reducing in value, which also reduces their IHT liability. On the other hand, the capital accounts of Son and Daughter would increase in value, on the basis that they are retaining profits they do not withdraw from the business.
There are three main reasons for adding one or more corporate members to an LLP. These are:-
To bring properties owned by an existing Limited Company under the same umbrella of the partnership, where profits and losses, income and expenses are shared pro-rata to equity
To enable the partnership to acquire further properties within a Limited Company structure which is unaffected by the restrictions on finance cost relief
To ring-fence some of the risks associated with ongoing property management
It is important to note that corporate members of an LLP cannot receive ‘partners salaries’ or profit share which is disproportionate to their ordinary income/profit share based on the value of their partnership capital account. This would fall foul of HMRC’s “Transfer of Income Streams” legislation [LINK]. This is why Property118 Limited advocates extreme caution when considering what is being touted as the ‘Hybrid Scheme’ which claims to be a ‘one-size-fits-all’ tax planning solution [LINK]. However, corporate members may charge a ‘reasonable commercial fee’ for activities they perform on behalf of all members. For example, this might include property management or maintenance. The “Transfer of Income Streams” legislation only poses a problem where the tax system is abused, e.g. where a corporate member charges significantly more for a service than could be sourced elsewhere in the market locally. Where this is the case, the excess is taxed as if the income had never been transferred and interest and penalties on overdue tax may also apply if the tax system has been abused.
Tax Advantages of having a corporate member to provide services to the LLP
Unlike individuals, which pay income tax based on a banded tax basis, Limited Companies pay a flat rate of corporation tax (currently 19% and scheduled to reduce to 17%). Where the individual members of an LLP wish to retain profits, perhaps to save for deposits for further investments or to pay down partnership mortgages, having a corporate members allows them to do so without paying the higher rates of personal tax on those retained profits. Similarly, the individual members may wish to reduce their ‘taxable income’ for tax purposes.
Other advantages of an LLP
Individual landlords may not qualify as a business in their own rights for the purposes of claiming incorporation relief [LINK]. However, as a result of the pooling their resources, by forming an LLP, their eligibility for incorporation reliefs eventually becomes unquestionable. Likewise, when a ‘whole business’ is transferred into a Limited Company by a partnership, there is relief available to mitigate the Stamp Duty Land Tax “SDLT” [LINK], or Land and Buildings Transaction Tax “LBTT” where properties are located in Scotland [LINK].
As you might expect, HMRC has anti-avoidance provisions to ensure the tax system isn’t abused by landlords who might form LLP’s simply to avoid tax at the point of incorporation. Those provisions are known as “GAAR”(General Anti Abuse Rules). In Scotland, the word “Abuse” is replaced with Avoidance in GAAR. By way of example of the way GAAR affects SDLT relief in England, Section 75a of the Finance Act 2003 explains that claims for relief on Stamp Duty may be ignored if a partnership claims the relief within three years of formation.
Where ‘taxable rental profits’ and other taxable income from all sources combined exceeds an average of £50,000 per owner it is often the case that a Limited Company is a more tax advantageous structure than an LLP. However, an LLP is often used as a ‘stepping-stone’ strategy where a partnership doesn’t already exist. This is especially the case where mortgage debt is significantly less than the original acquisition costs of the property portfolio as a whole, because there is then a further opportunity to consider Capital Account Restructuring as part of the tax planning process. Furthermore, Limited Companies also provide additional Inheritance Tax “IHT” planning opportunities in the form of Freezer Shares to cap the value of shares for the older generation and to accrue future growth in share value for the younger generation of the family.
Another benefit of the LLP structure is that it is a separate legal entity, much like a Limited company. Therefore, it cannot be argued that a Limited Liability Partnership is not a business, even if there is only one property.
Landlord Tax Planning Consultancy is the core business activity of Property118 Limited (in association with Cotswold Barristers).
Limited Liability Partnership “LLP” LANDLORDS’ CASE STUDY
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 powerful 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 in value – 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.
Property118 Ltd understands that your privacy is important to you and that you care about how your personal data is used and shared online. We respect and value the privacy of everyone who visits this website, www.property118.com (“Our Site”) and will only collect and use personal data in ways that are described here, and in a manner that is consistent with Our obligations and your rights under the law.
Definitions and Interpretation
In this Policy the following terms shall have the following meanings:
means an account required to access and/or use certain areas and features of Our Site;
means a small text file placed on your computer or device by Our Site when you visit certain parts of Our Site and/or when you use certain features of Our Site. Details of the Cookies used by Our Site are set out in section 13, below;
means the relevant parts of the Privacy and Electronic Communications (EC Directive) Regulations 2003;
means any and all data that relates to an identifiable person who can be directly or indirectly identified from that data. In this case, it means personal data that you give to Us via Our Site. This definition shall, where applicable, incorporate the definitions provided in the EU Regulation 2016/679 – the General Data Protection Regulation (“GDPR”); and
Means Property118 Ltd , a limited company registered in England under company number 10295964, whose registered address is 1st Floor, Woburn House, 84 St Benedicts Street, Norwich, NR2 4AB.
Information About Us
Our Site is owned and operated by Property118 Ltd, a limited company registered in England under company number 10295964, whose registered address is 1st Floor, Woburn House, 84 St Benedicts Street, Norwich, NR2 4AB.
Our VAT number is 990 0332 34.
Our Data Protection Officer is Neil Patterson, and can be contacted by email at email@example.com, by telephone on 01603 489118, or by post at 1st Floor, Woburn House, 84 St Benedicts Street, Norwich, NR2 4AB.
What Does This Policy Cover?
As a data subject, you have the following rights under the GDPR, which this Policy and Our use of personal data have been designed to uphold:
The right to be informed about Our collection and use of personal data;
The right of access to the personal data We hold about you (see section 12);
The right to rectification if any personal data We hold about you is inaccurate or incomplete (please contact Us using the details in section 14);
The right to be forgotten – i.e. the right to ask Us to delete any personal data We hold about you (We only hold your personal data for a limited time, as explained in section 6 but if you would like Us to delete it sooner, please contact Us using the details in section 14);
The right to restrict (i.e. prevent) the processing of your personal data;
The right to data portability (obtaining a copy of your personal data to re-use with another service or organisation);
The right to object to Us using your personal data for particular purposes; and
If you have any cause for complaint about Our use of your personal data, please contact Us using the details provided in section 14 and We will do Our best to solve the problem for you. If We are unable to help, you also have the right to lodge a complaint with the UK’s supervisory authority, the Information Commissioner’s Office.
For further information about your rights, please contact the Information Commissioner’s Office or your local Citizens Advice Bureau.
What Data Do We Collect?
Date of birth;
Address and post code;
Business/company name and trading status;
Number of properties owned;
Contact information such as email addresses and telephone numbers;
Proof of residence and ID;
Financial information such as income and tax status;
Landlords insurance renewal dates;
Property Portfolio details such as value and mortgage outstanding;
How Do We Use Your Data?
All personal data is processed and stored securely, for no longer than is necessary in light of the reason(s) for which it was first collected. We will comply with Our obligations and safeguard your rights under the GDPR at all times. For more details on security see section 7, below.
Our use of your personal data will always have a lawful basis, either because it is necessary for our performance of a contract with you, because you have consented to our use of your personal data (e.g. by subscribing to emails), or because it is in our legitimate interests. Specifically, we may use your data for the following purposes:
Providing and managing your access to Our Site;
Supplying our products and or services to you (please note that We require your personal data in order to enter into a contract with you);
Personalising and tailoring our products and or services for you;
Replying to emails from you;
Supplying you with emails that you have opted into (you may unsubscribe or opt-out at any time by the unsubscribe link at the bottom of all emails;
Analysing your use of our site and gathering feedback to enable us to continually improve our site and your user experience;
Provide information to our partner service and product suppliers at your request.
With your permission and/or where permitted by law, We may also use your data for marketing purposes which may include contacting you by email and or telephone with information, news and offers on our products and or We will not, however, send you any unsolicited marketing or spam and will take all reasonable steps to ensure that We fully protect your rights and comply with Our obligations under the GDPR and the Privacy and Electronic Communications (EC Directive) Regulations 2003.
You have the right to withdraw your consent to us using your personal data at any time, and to request that we delete it.
We do not keep your personal data for any longer than is necessary in light of the reason(s) for which it was first collected. Data will therefore be retained for the following periods (or its retention will be determined on the following bases):
Member profile information is collected with your consent and can be amended or deleted at any time by you;
Anti-Money Laundering information and tax consultancy records are to be kept as required by law for up to seven years.
How and Where Do We Store Your Data?
We only keep your personal data for as long as We need to in order to use it as described above in section 6, and/or for as long as We have your permission to keep it.
Some or all of your data may be stored outside of the European Economic Area (“the EEA”) (The EEA consists of all EU member states, plus Norway, Iceland, and Liechtenstein). You are deemed to accept and agree to this by using our site and submitting information to Us. If we do store data outside the EEA, we will take all reasonable steps to ensure that your data is treated as safely and securely as it would be within the UK and under the GDPR
Data security is very important to Us, and to protect your data We have taken suitable measures to safeguard and secure data collected through Our Site.
Do We Share Your Data?
We may share your data with other partner companies in for the purpose of supplying products or services you have requested.
We may sometimes contract with third parties to supply products and services to you on Our behalf. Where any of your data is required for such a purpose, We will take all reasonable steps to ensure that your data will be handled safely, securely, and in accordance with your rights, Our obligations, and the obligations of the third party under the law.
We may compile statistics about the use of Our Site including data on traffic, usage patterns, user numbers, sales, and other information. All such data will be anonymised and will not include any personally identifying data, or any anonymised data that can be combined with other data and used to identify you. We may from time to time share such data with third parties such as prospective investors, affiliates, partners, and advertisers. Data will only be shared and used within the bounds of the law.
In certain circumstances, We may be legally required to share certain data held by Us, which may include your personal data, for example, where We are involved in legal proceedings, where We are complying with legal requirements, a court order, or a governmental authority.
What Happens If Our Business Changes Hands?
How Can You Control Your Data?
In addition to your rights under the GDPR, set out in section 4, we aim to give you strong controls on Our use of your data for direct marketing purposes including the ability to opt-out of receiving emails from Us which you may do by unsubscribing using the links provided in Our emails.
Your Right to Withhold Information
You may access certain areas of Our Site without providing any data at all. However, to use all features and functions available on Our Site you may be required to submit or allow for the collection of certain data.
How Can You Access Your Data?
You have the right to ask for a copy of any of your personal data held by Us (where such data is held). Under the GDPR, no fee is payable and We will provide any and all information in response to your request free of charge. Please contact Us for more details at firstname.lastname@example.org, or using the contact details below in section 14.
All Cookies used by and on Our Site are used in accordance with current Cookie Law.
Before Cookies are placed on your computer or device, you will be shown a cookie prompt requesting your consent to set those Cookies. By giving your consent to the placing of Cookies you are enabling Us to provide the best possible experience and service to you. You may, if you wish, deny consent to the placing of Cookies; however certain features of Our Site may not function fully or as intended. You will be given the opportunity to allow only first party Cookies and block third party Cookies.
Certain features of Our Site depend on Cookies to function. Cookie Law deems these Cookies to be “strictly necessary”. These Cookies are shown below in section 13.5. Your consent will not be sought to place these Cookies, but it is still important that you are aware of them. You may still block these Cookies by changing your internet browser’s settings as detailed below in section 13.9, but please be aware that Our Site may not work properly if you do so. We have taken great care to ensure that your privacy is not at risk by allowing them.
The following first party Cookies may be placed on your computer or device:
Name of Cookie
Used only to collect performance data, with any identifiable data obfuscated
This cookie is strictly necessary for Cloudflare's security features and cannot be turned off.
Our Site uses analytics services provided by Google Analytics and Facebook. Website analytics refers to a set of tools used to collect and analyse anonymous usage information, enabling Us to better understand how Our Site is used. This, in turn, enables Us to improve Our Site and the products AND/OR services offered through it. You do not have to allow Us to use these Cookies, however whilst Our use of them does not pose any risk to your privacy or your safe use of Our Site, it does enable Us to continually improve Our Site, making it a better and more useful experience for you.
The analytics service(s) used by Our Site use(s) Cookies to gather the required information.
The analytics service(s) used by Our Site use(s) the following Cookies:
Name of Cookie
First / Third Party
__utma, __utmb, __utmc, __utmt, __utmz
Helps to understand how their visitors engage with our website
Helps to understand how their visitors engage with our website
In addition to the controls that We provide, you can choose to enable or disable Cookies in your internet browser. Most internet browsers also enable you to choose whether you wish to disable all cookies or only third party cookies. By default, most internet browsers accept Cookies but this can be changed. For further details, please consult the help menu in your internet browser or the documentation that came with your device.
You can choose to delete Cookies on your computer or device at any time, however you may lose any information that enables you to access Our Site more quickly and efficiently including, but not limited to, login and personalisation settings.
It is recommended that you keep your internet browser and operating system up-to-date and that you consult the help and guidance provided by the developer of your internet browser and manufacturer of your computer or device if you are unsure about adjusting your privacy settings.