Limited Liability Partnership (LLP)
We are finding that Limited Liability Partnerships (LLP) are increasingly popular for many landlord businesses.
The main benefits are-
- The ability to use all the personal Income Tax allowances for participating members, even if they do not introduce property or capital to the business
- Allocation of profits for maximum tax efficiency
- Long-term succession planning
- Limitation of personal liability to the amount invested
- No CGT or SDLT charges on set-up, if done correctly
- No need to refinance mortgages
An LLP is a type of corporate structure, but is not itself taxed. The members will pay tax on profits allocated to them.
How income tax works-
Mr and Mrs X have a portfolio of £1,500,000 value with £1,000,000 mortgages. Their share of the LLP (“Capital Account”) on formation would be £250,000 each, and their properties are introduced to the LLP.
Profit is £50,000 gross, evenly split.
Mr X has no other income, but Mrs X earns £100,000 a year in employment. It is perfectly permissible to allocate all of the profits to Mr X, to ensure he uses his basic and nil rate bands this would also remove £25,000 from Mrs X’s 40% band.
It is also possible to make other participants in the business members, and ensure all personal allowances are used.
How Inheritance Tax works.
The next generation of chosen successors can be made members with no capital input. So long as they work in the business they can be made members. In year 1 they could, say, be allocated £50,000 in profit BUT they only will draw out the £12,500 needed for tax, leaving the rest in their capital accounts. The senior members, who have introduced the capital, will have no/reduced profit allocated, but will draw on their capital for their needs. This is tax-free. This has the effect of reducing the senior members’ IHT estate whilst increasing the capital shares of the successors over time.
Remember, Income tax is paid on profit allocated, not drawings.