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Investing in UK property through an LLP

There are many ways to invest in UK property – the most common ways to do so are as an individual or via a company.

One other way to do so is through an LLP.

 

What is an LLP?

An LLP is a type of partnership. It is generally a preferred vehicle as it provides all the flexibility of a traditional partnership with the ‘limited liability’ that limited companies enjoy.

Partners in an LLP can be individuals or companies.

 

How would the LLP be taxed?

An LLP is transparent for tax purposes. This means that the LLP itself is not taxed, but rather the individual partners of the LLP are taxed on their share of the LLP’s income or gains.

The tax rate applied is therefore at each partner’s marginal rate of tax, which could of course be as high as 45% for individual partners.

The new mortgage relief interest rules should also be considered, as from April 2020, all individuals will only get tax relief of up to 20% on mortgage interest, whereas companies will continue to get full relief – see article Mortgage relief for higher rate taxpayers.

However, as mentioned below, the partnership profit split can be changed year on year if required and beneficial – this is much harder for companies and individuals.

 

What are the benefits of using an LLP?

In a similar way to a ‘normal’ partnership, the main benefit of an LLP is flexibility, to enable profits to be shared out between partners however wanted.

Family, friends and business partners can be added to the LLP very easily, and without the problem that companies have of revaluing the shares each time.

This means that LLPs are likely to be most beneficial for property transactions where there are likely to be significant changes in partners or the percentage holdings of the partners.

For companies, profits must be shared out according to the shareholdings. There are ways of getting around this e.g. by using alphabet shares, but this can be difficult to change and manage.

For individuals owing property jointly, there are also ways to change the shareholdings, but these need to be disclosed to HMRC, and it would be very difficult to add or remove individuals.

In addition, there is no double taxation like for companies, where there is corporation tax to pay as well as tax on dividends when the profits are distributed. Therefore, it is generally only worthwhile having companies as partners where the funds are to be retained in the company.

LLPs can also enter into contracts in their own name (rather than the investor’s personal name) and are a separate legal entity to the owners.

 

What are the drawbacks of using an LLP?

As mentioned earlier, income is taxed at the individual partners’ marginal rate, which can be as high as 45%.

There are also additional administrative requirements when compared to individual holding, in that accounts need to be filed and kept on the public record at Companies House.

 

LLPs are most likely to be useful in situations involving property development activity funded or managed by individuals with diverse tax positions, and who want the added benefits of limitation to their own personal liability, but can be useful in other situations as well.

Please get in touch if you would like to discuss this with us further.

 

farley-kaye

Farley Kaye FCA

Managing Partner

For more information please contact Farley:

farley.kaye@fkgb.co.uk
052 627 7472