Something different: Using a property LLP

Sarah Bradford highlights some of the advantages and disadvantages of using a property LLP. 

When looking to set up a property business, most people will weigh up the pros and cons of operating as an unincorporated property business or as a limited company.  

However, these are not the only options available to would-be landlords; another option to consider is operating as a limited liability partnership (LLP). 

A property LLP can work well in a family situation. It can also be beneficial where individuals wish to group together to hold property while sharing risk and expertise. 

What is an LLP? 

An LLP is something of a hybrid between a company and a traditional partnership. Like a limited company, it offers the advantage of limited liability; and like a traditional partnership, it provides the flexibility to agree how to share profits between the partners. 

As with a company, an LLP must be registered at Companies House and must file accounts at Companies House.  

Setting up an LLP 

A property LLP can be set up with two or more members. The members do not have to be individuals; a member can be a person or a company (a ‘corporate partner’).  

The process of setting up an LLP differs from that for setting up a traditional partnership. To set up a property LLP, it is necessary to: 

• choose an acceptable name (which must end in ‘Limited Liability Partnership’ or ‘LLP’); 
• have a registered office (the address of which is publicly available); 
• have at least two ‘designated members’; 
• have an LLP agreement, which sets out how the LLP will be run; and 

• register the LLP with Companies House. 

Partners’ responsibilities 

An LLP needs a minimum of two partners and must have at least one ‘general partner’ and one ‘limited partner’. Partners can be an individual or a company. A person cannot be a limited partner and a general partner at the same time. The type of partner a person is determines their responsibilities and their liability for partnership debts. 

Until the partnership has been registered as an LLP, all partners are equally responsible for any debts or obligations of the partnership. 

A limited partner must contribute an amount of money or property to the property business when the LLP is set up and is only liable for debts up to the amount that has been contributed. Thus, as the name suggests, a limited partner benefits from limited liability. However, a limited partner cannot manage the business and cannot take their original contribution out of the business.  

By contrast, a general partner is liable for any debts that the LLP cannot pay; the general partner does not have the benefit of limited liability. The general partner is also responsible for controlling and managing the business and can make decisions which are binding on the business. The general partner is responsible for: 

• registering the business with Companies House; 
• registering the business for self-assessment; and 

• registering the business for VAT if the VATable turnover exceeds the VAT registration threshold of £85,000. 

The general partner can also act for the business if it is wound up. 

LLP agreement 

As with a traditional partnership, there must be a partnership agreement; in this case, the LLP agreement. The LLP agreement sets out: 

• how profits are to be shared between the members; 
• who needs to agree decisions affecting the business; 
• the responsibilities of the members; and 

• the process by which members can join or leave the LLP. 

Tax treatment 

An LLP is transparent for tax purposes. As with an ordinary partnership, each partner pays tax on their share of the profits. The individual partners are treated as being self-employed for tax purposes and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where the relevant thresholds are exceeded. 

If the LLP has corporate members, the corporate member will pay corporation tax on their share of profits. Introducing a corporate partner may be seen as advantageous to take advantage of the fact that at 19%, the rate of corporation tax is lower than the income tax rates. However, where profits are allocated to a corporate partner, there remains the issue of extracting those profits, which brings with it its own tax bills, depending on the extraction method chosen.  

Where a property is sold realising a gain, the individual partners pay capital gains tax (CGT) on their share of the gain. Gains attributable to a corporate partner are liable to corporation tax on chargeable gains. 

Each individual partner must be registered for self-assessment and return their income from the LLP on their personal tax return. The LLP must file a partnership return.  

Corporate members must file a company tax return and file accounts at Companies House. 

Anti-avoidance provisions apply if the LLP is not carried on with a view to profit. These result in tax transparency being switched off. 

Putting property into the LLP 

If an LLP is to be used for a property business, property has to be put into the LLP. Unlike a traditional partnership, an LLP can hold property in its own right. 

Properties transferred to the LLP on trust are held by the LLP. This is achieved from a legal perspective by a beneficial interest transfer agreement. For each property that is held on trust by the LLP, the document will show its address, its market value at the date of transfer and any outstanding mortgage on the property. 

Where a member of the LLP makes a transfer of property, the value of the equity that they have introduced will be shown in the opening balance on their individual capital account.  

Putting property into trust in the LLP is advantageous from a tax perspective in that there is no CGT or stamp duty land tax to pay; the legal ownership of the property remains unchanged by the creation of the LLP and the individuals remain responsible for mortgages and any other debts that they may have in relation to the property. 

Flexibility to share profits and losses 

One of the main advantages of an LLP is the flexibility to share profits and losses in a tax-efficient manner. The partners can agree the allocation of profits and specify the profit sharing ratio.  

In the absence of an agreed profit sharing ratio, in an LLP the default position (unlike that for a traditional partnership where profits and losses are shared equally) is to allocate profits and losses in accordance to the ratio of the balance on each individuals’ capital accounts.  

The option to pay partnership salaries in a different ratio provides a further opportunity to allocate profits in a tax-efficient manner and reduce the overall tax payable by the members of the LLP. Withdrawing capital will change the balance on the capital accounts and, where this is the basis of the profit sharing arrangement, alter the profit sharing ratio. 

Example: Family LLP 

The Brown family create a property LLP. Ben Brown owns four properties on which he receives rental income of £100,000. He has equity in the properties of £500,000. His wife, Carol, has two properties which provide her with rental income of £40,000. She has equity in the properties of £400,000. Their daughter, Delia, has one property on which she receives rental income of £10,000. She has equity of £100,000 in the property. None of them has any other income. 

If the properties are held by them individually, Ben will pay tax of £27,500, Carol will pay tax of £5,500 and Delia will pay no tax. As a family, their total tax bill is £33,000. 

They agree to set up a property LLP and pay Delia a salary of £40,000 to manage the properties and Carol a salary of £10,000 to undertake part-time administrative duties. The remaining profits (i.e. £100,000) are allocated in accordance with the balances on their capital accounts. As a result, the tax position is as follows: 

By setting up an LLP, the family’s combined tax bill is reduced by £10,500. 

Practical tip  

Don’t overlook an LLP as a potential structure for a property lettings business.