Why don’t Partnerships pay SDLT on land transfers? Reply

 

strategies

With the introduction of interest rate restrictions from 2017/18 for individual Property Investors there has been a lot of interest in incorporating property businesses.

Technically property investment isn’t a business although HMRC seem to have blurred the lines with their Making Tax Digital documents which describe Property Investment as a Business.

The recent clarification from the Ramsay case has meant that even investors with a small portfolio are likely to qualify for incorporation tax relief provided the landlord is sufficiently active in managing their properties. Claiming Incorporation Tax Relief rolls forward the capital gain into the company.

So that leaves SDLT and re-financing costs as the next major hurdles.

The rules on SDLT for Partnerships are in the Finance Act 2003 Schedule 15 and amendments in the Finance Act 2006 Schedule 24.

http://www.legislation.gov.uk/ukpga/2003/14/schedule/15

http://www.legislation.gov.uk/ukpga/2006/25/schedule/24

It is complicated but essentially it comes down to the following formulae

MV x (100 – sum of lower proportions (SLP))%

What this means is that if the land being put into the partnership is effectively retained by the transferor-partner (or persons connected with the transferor) after the transaction, you basically end up with:

MV x (100-100) = £0

So a husband and wife partnership owning 50% each could transfer the property to a company for 50% of the shares each and in theory there would be no SDLT charge.

To qualify as a Partnership or LLP:

  1. You need to be registered with HMRC
  2. You need a partnership agreement
  3. You need separate bank accounts
  4. Leases and Agreements need to be in the name of partnership

HMRC also require that any restructuring is for Commercial Reasons and not to avoid tax, otherwise it will be caught by anti tax avoidance rules.

steve@bicknells.net

 

 

 

Why some Companies are becoming Partnerships… Reply

strategies

Choosing the right Business Structure can have a significant impact on how much tax you pay and it is possible to change from one structure to another.

Here are some useful links comparing structures:

Sole Trader v’s Limited Company

LLP v’s Limited Company

Limited Company v’s PLC

So why are some Companies changing back to Partnerships/Limited Liability Partnerships?

 LLP’s can provide an alternative method of remuneration for key employees, rather than the traditional routes of dividends or salary.  Such employees could terminate their employment contract, form an LLP and provide consultancy services to the business.  The individual would then save an element of national insurance, as rates are lower for the self employed than for the employed.  In addition, the business will benefit from a tax deduction on the charges made by the LLP, and save employer’s national insurance at a rate of 13.8%, potentially a significant saving. IR35 regulations would need to be considered in this plan.

Alternatively, an LLP could be used to remunerate all employees. They could all resign and become members of a “service“ LLP.  This would have the advantages of national insurance savings as above.  There are non tax areas to consider, for example the individuals will lose their employment rights on becoming self employed (this could be a huge advantage to the employer).  Clearly this risk would have to be appropriately managed and considered throughout.

http://www.plummer-parsons.co.uk/business-services/business-planning/business-forms/tax-planning-limited-liability-partnerships-llps

How much NI could be saved?

Employers pay 13.8%

Employees pay 12% on earnings above £146/week (2012/13) and 2% on earnings above £817/week (2012/13)

So for most employees that means on most of their earnings the employer and employee NI is 25.8%

The Self Employed (Sole Traders and Partnerships) pay Class 2 and Class 4 NI

Class 2 is £2.65/week (2012/13)

Class 4 is 9% on profits above £7,605 and up to £42,475, after that its 2% (2012/13)

http://www.hmrc.gov.uk/rates/nic.htm

So we are comparing 25.8% for employees with 9% for partners, a potential saving of 16.8%

Another area of tax saving is on the sale of the business using the Entrepreneurs Tax Relief 

Capital Gains Tax could be as high as 28% or as low as 10% with the Entrepreneurs Tax Relief.

The qualifying conditions are less stringent on partnerships, in a company the shareholder must:

  •  own at least 5 per cent of the ordinary share capital and have at least 5 per cent of the voting rights
  • you must have been an officer or employee of the company

These rules don’t apply to partnerships.

For short term projects such as a property development an LLP could save tax but for many businesses a limited company could be a better option.

You could of course have a mixture with companies and LLP’s holding shares or being partners.

steve@bicknells.net