UK: Limited Liability Partnerships And UK Real Estate

Last Updated: 28 May 2003
Article by Lee Nuttall

The Limited Liability Partnerships Act 2000 created a new form of legal entity known as a limited liability partnership. A limited liability partnership has unlimited legal capacity and can be used to carry on any form of lawful business including dealing with, development of and investment in UK real estate. Its most attractive feature as a vehicle for the holding of UK real estate is its ability to combine the flexibility and tax transparency of a partnership with limited liability for its members.


  • A limited liability partnership (LLP) is a new form of legal entity. It is a special sort of body corporate. It is neither a partnership nor a limited partnership (even though its name includes those words). Generally, partnership law (including the Partnership Act 1890) does not apply to it.
  • An LLP is a body corporate and is formed by incorporation. It exists as a legal person distinct from its members.
  • It has the legal capacity to do anything that a natural person can do. It can own UK real estate in its own right; enter into contracts; trade, develop and invest; enter into deeds; sue and be sued; enter into funding and financing agreements and grant security over its assets in its own name. It has rights, liabilities and obligations separate to and independent of its members.
  • An LLP exists wholly independently of its members and of changes to its membership. It has an open ended and indefinite existence, and will continue until its winding up.
  • Two or more persons, associated for carrying on a lawful business with a view to profit, are able to form an LLP. In law a "person" includes individuals and companies. The members of an LLP can therefore be companies, individuals or a mixture of the two. Non-profit making organisations (such as charities and members’ clubs) are however, excluded from setting up LLPs.
  • Members of an LLP are free to agree between themselves their relationship with each other. This makes the LLP very flexible. The internal affairs of an LLP (the rights and duties between the LLP and its members) are ordinarily set out in an LLP agreement. The members are free to write their own rules. The agreement remains confidential between the members and the LLP. Neither disclosure nor registration requirements apply.
  • In default of an LLP agreement, there are a number of statutory rules to determine the relationship between members. These "default" provisions (dealing, for example, with profits shares and capital contributions; a complete bar on assignment of LLP interests without consent) are unlikely to be appropriate except in the most basic and straightforward arrangements.

Limited liability

  • The liability of individual members is limited. This is to be contrasted with the liability of partners in general partnership, who are jointly and severally liable for the debts and obligations of the firm and the acts of other partners.
  • The personal assets of a member of an LLP will not be at risk for acts of the LLP or other members. The separate legal personality of the LLP, in law, enables the liability of its members to be limited. The LLP (and not its members) will be liable to third parties.
  • There is no requirement for a minimum capital commitment from members (which capital would then be available for creditors) or for a guarantee from members of the obligations of the LLP. The extent to which members actually contribute capital therefore becomes a matter of commercial/economic negotiation. It may be that third parties (for example, landlords, lending banks and sellers) will require personal guarantees from members. This, of course, would negate the whole purpose of carrying on an activity via a limited liability vehicle.
  • Limited liability of members means that:

a) claims can be made against an LLP to the full extent of its assets;
b) members will not be jointly and severally liable (either in contract or in tort) for the acts or omissions of any other member simply by virtue of their membership of the LLP. Every member of an LLP is its agent. Members are not agents for each other, and thus joint and several liability is avoided;
c) individual members may however incur personal liability under the general law in addition to that of the LLP. For example, it is likely that a professional who is a member could still be personally liable for his own negligence to the extent of his personal assets, even though fellow innocent members will have no personal liability;
d) if the LLP goes into insolvent liquidation, then members may be obliged to pay monies which have been drawn out of the LLP within a two-year period prior to the insolvent liquidation.

Financial disclosure and regulation

  • LLPs have similar financial and disclosure requirements to limited companies. This means that the LLP (and its members) will be subject to financial disclosure, penalties for fraudulent trading, and winding up and disqualification provisions similar to those which apply to limited companies and their directors.
  • LLPs can only be formed by incorporation and so will need to be registered at Companies House. In order to be registered, the following items must be delivered to the Registrar of Companies:

a) an incorporation document; and
b) a statement to the effect that there has been compliance with the requirement that at least two people who are associated with the carrying on of a lawful business with a view to profit have subscribed their names to the incorporation document.

  • The incorporation document must include prescribed information - the name of the LLP, the situation and address of the registered office, the name and address of the persons who are to be members on incorporation and details of the members who are to be designated members.
  • When all the requirements for registration have been fulfilled, Companies House will issue a certificate of incorporation setting out the LLP’s name. This is evidence of compliance with all requirements of registration.
  • There are two types of members - designated members and members. Designated members have to perform the administrative and filing duties of the LLP, including informing the Registrar of changes to details of members, keeping accounting records, signing the accounts (after approval by the members), filing accounts, filing the auditor’s report and the annual return and the appointment and removal of auditors.
  • The details of all members (including home addresses) must be delivered to the Registrar and kept on a register for public inspection. Notice of someone becoming or ceasing to be a member has to be filed within 14 days of that event. The auditing and accounting requirements for LLPs are similar to those applied to limited companies. These requirements include financial disclosure. The annual accounts of an LLP must be filed at Companies House, and they must be audited (but subject to the same de minimis rules as for limited companies).


  • The major corporate insolvency and winding up procedures contained in the Insolvency Act 1986 will apply to LLPs. These include a provision granting the courts a discretion to order repayment of any withdrawals made by a member of an LLP within the two years prior to its winding up (a "claw-back" order). The court is not able to make a claw-back order where it is satisfied that, after each withdrawal made by members whilst the LLP was solvent, there remained a reasonable prospect of the LLP avoiding insolvent liquidation. Members with a genuine belief in the future viability of the insolvent LLP should not be penalised.
  • Members of an LLP can be sued for wrongful and fraudulent trading, and can be disqualified from being members of an LLP in the same way as directors can be prohibited from acting under the current insolvency legislation.

Limited liability partnerships and the Financial Services and Markets Act 2000

  • Each member of an LLP is entitled to take part in the management of the business. Where however, day-to-day control of the business is passed to one or more of the members, then it is likely that the LLP will be a collective investment scheme (CIS) for the purposes of the Financial Services and Markets Act 2000 (FSMA).
  • Even if this is the case, where each member carries on a business other than an "investment business" (within the meaning of FSMA) and it becomes a member for commercial purposes related to that business, then the LLP will be excluded from the CIS definition.
  • In any other case it is very likely that the LLP will amount to a CIS.
  • The significance of this is that the FSMA requires anyone who establishes, operates or winds up a CIS to be appropriately authorised under the FSMA. Failure to obtain authorisation may result in criminal sanctions and the unenforceability of agreements made by that person.
  • Responsibility for the operating of the LLP may be delegated, by means of an appropriate agreement, to a person authorised by the Financial Services Authority. This will avoid the need to obtain and maintain a separate authorisation for the LLP (which is a fairly onerous process). There are companies in the market place authorised by the Financial Services Authority who are prepared to provide this service for a fee.


  • One of the principal attractions of an LLP is that it is tax transparent. Each member can (subject to certain restrictions) participate in the LLP in such a way that there is no higher a tax charge than if it had carried out the business itself.
  • This does not mean however that the profits arising from an LLP will be exempt. Profits are taxed as if the business was carried on by the members as partners in partnership. There is no special tax treatment or relief available to LLPs or their members beyond the those available to partners in partnership.
  • There are adverse tax consequences for certain sorts of entity which become members of either an "investment LLP" or a "property investment LLP" (see below). This prejudices the usefulness of an LLP as vehicles for holding real estate for that type of member.
  • Taxes on income: The profits of the LLP are calculated in accordance with the tax rules applying to members. Where a member is subject to income tax, tax is calculated by reference to the income tax rules; where a member is subject to corporation tax, those rules apply to the calculation of profit. An income tax payer will be liable for profits arising for the accounting period ending in the relevant tax year. The members are taxed under self-assessment directly as if they were partners in partnership. The LLP is required to make an annual tax return. Members who are corporation tax payers have their profit arising from the LLP calculated under the corporation tax rules and will be taxed according to the accounting period of the relevant member.
  • UK-resident companies are subject to corporation tax on their profits, derived from the business of the partnership. Individuals are subject to income tax, as are foreign companies (unless they are carrying on a trade in the UK through a branch or agency, in which case they are also subject to corporation tax) and foreign individuals. It should be possible to arrange matters so that the non-UK resident member’s liability to tax on income is limited to basic rate income tax.
  • Taxes on capital gains: The capital gains tax rules relevant to partners in partnership apply to members of an LLP. Each member is treated as owning an appropriate share of the underlying LLP asset and any transaction by the LLP involving one of its assets is treated as a transaction by each of the members in relation to its share of the overall asset.
  • Upon a disposal of real estate by the LLP, each member is treated as making a disposal of its fractional share of that real estate, and any capital gain (subject to usual allowances and relief) crystallising on that disposal is charged to tax in the hands of the member, dependant upon its particular tax position. A non-UK resident member will not suffer UK tax on any such gain unless it is carrying on a trade in the United Kingdom through a branch or agency. Investment in real estate is not a trade for these purposes.
  • There are anti-avoidance provisions designed to recategorise as income any capital gains arising on a disposal of real estate acquired or developed with the sole or main aim of realising a capital gain on disposal. These should not apply where the objective of acquiring or developing the real estate is to create a source of income and to achieve medium-to-long term capital appreciation.
  • Value added tax: The LLP is treated as a VAT-able entity separate from its members. The LLP is required to register for VAT (in its own name) if it is making taxable supplies in excess of the registration threshold. Where it is only making supplies of UK real estate and has elected to waive the VAT exemption, the LLP should recover all input VAT incurred by it.
  • Stamp duty: In practice, this relates mainly to real estate. Transfers of UK real estate to the LLP will be subject to stamp duty in the normal way (at rates up to 4%).
  • Stamp duty is currently being modernised. The Finance Act 2003 will provide for a new tax (stamp duty land tax or SDLT) for land transactions and is expected to have an implementation date of 1 December 2003. Upon its implementation, SDLT will be due on any transaction relating to UK real estate (whether in writing or not, whether or not executed in the UK and whether or not an party has any connection with the UK). A sale by the LLP of any of its real estate will result in an SDLT charge, for which the buyer will be liable.
  • The view of the Inland Revenue is that stamp duty is due on the transfer of an interest in an LLP (payable at rates up to 4%) and that the 0.5% rate applicable to shares is not available.
  • Investment LLPs: Tax relief is removed for individuals for interest paid on money borrowed in order to invest in an "investment" LLP. An investment LLP is defined as a business which consists wholly or mainly in the making of investments, from which the principal part of its income is derived.
  • Property investment LLPs: Where a member of a property investment LLP is a pension fund, the pension business of a life insurance company or the tax-exempt business of a friendly society, exemption from tax on income and gains (which would otherwise be enjoyed were any of these entities to hold the real estate direct) is removed. This provision does not prejudice other members of the LLP who do not fall in these categories. A property investment LLP is an investment LLP where the investments are wholly or mainly in land.

This briefing note contains information of general interest about current legal issues, but does not give legal advice.

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