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.

Introduction

  • 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).

Insolvency

  • 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.

Taxation

  • 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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.