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TaxRobin
TaxRobin, Tax Consultant
Category: Tax
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Experience:  International tax
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Hi experts. Let me first THANK you for taking the time and

Resolved Question:

Hi experts. Let me first THANK you for taking the time and reading about my little problem.
For the purpose of tax efficiency, I am unsure whether I should open a Ltd, LLP or just do it as a private person. I am a trader with big city banks for 15 years and I now start trading the futures markets by myself to start building a track record for a later hedge fund setup.
Second, does it have an impact on VAT and what I have to pay (or not)?
Many thanks indeed,
Chris, London
Submitted: 3 years ago.
Category: Tax
Expert:  TaxRobin replied 3 years ago.
Hello,
As far as the choices you mentioned, unless there is another in this with you, the LLP is not an option. The 'Limited Liability Partnership" (LLP) format of registered company is to enable the professions to take advantage of limited liability. A limited liability partnership does not have Directors or a Company Secretary, but it must have at least two members.
Between your other 2 choices, Private Limited Companies (LTD) have are a separate legal entity from their owners, the owners have no personal liability for the debts of the company.
Tax advantages gained would be dividends are taxed at a lower rate than income.
Ltd companies must submit annual accounts and an annual return to Companies House, if they do not, they will incur a penalty or be struck off the register of companies.
VAT is still relevant for either Ltd or if you are a sole trader. For VAT purposes, the individual or organisation that is in business is known as a 'taxable person'.
I cannot tell you which you should choose but, most choose to operate as a limited company because so many potential clients and agencies will only do business with individuals who operate in this way.
Of course you will have to pay corporation tax and you can't just withdraw money from the business without formally recording it as a salary, dividend or loan.
I sincerely XXXXX XXXXX is helpful but encourage you to also seek the advise of your personal tax advisor.
Customer: replied 3 years ago.

Hi, thank you for the reply.


I am most interested in the treatment of capital gains (that hopefully arise from trading). Most hedge funds are setup as LLP, why is that? I am still unsure whether I will pay more taxes on these capital gains through a company (LLP or LTD) or when I just declare as private capital gains.


Can you elaborate a bit more please?


Thank you

Expert:  TaxRobin replied 3 years ago.
Hello,
The differential in tax rates is not so pronounced for capital gains.
If the U.K. fund manager is established as a limited liability partnership (LLP), it is viewed as a see-through entity for tax purposes and the taxation liability will fall on the members of the LLP.
Most U.K. hedge fund managers are structured as an LLP with a corporate member and individual members because then the effective tax rate is a combination of the individual marginal rates and the corporation tax rate.
The hedge fund manager is taking a portion of the gain as a fee so the capital gains are applied to that. For a limited company, the profits realised will be subject to corporation tax at rates currently between 20% and 24%. The Government has announced its intention to reduce the main corporation tax rate to 23% from 1 April 2013 and to 22% from 1 April 2014.
Customer: replied 3 years ago.

Thanks. As I mentioned in the brief, at the moment I am trading my own capital and I don't manage other people's money. Surely for building an audited track record, it would be advisable to start within a company structure, but the performance could also be audited at a later stage (in case of private trading results). I guess it's easiest for me to understand with a simple example. Say I foresee £200k annual trading profit, what would I pay private and what when in a LLP?

Expert:  TaxRobin replied 3 years ago.
The amount you would pay is 20% for company profit up to £300,000 (£40k). Because you would be set up as a limited company, you get taxed as an employee of that company - meaning income tax and NI contributions will be deducted from your salary using the PAYE system.
Any dividends you receive may be taxed (that depends on the company notional 10% tax credit applied to dividends.
Company has already been taxed on the profits (Corporation Tax is levied at a rate of 20% for small companies)so the credit for divdends is applied. The ‘net dividend’ (the amount distributed to you) is multiplied by 10/9 to provide the ‘gross dividend’ amount, including the tax credit. This is the sum upon which income tax is payable. The credit for the company would be £222,222. The amount over that is taxable to you personally.
As a sole trader at that amount of income you would loose your allowance (as a high earner). Your tax rate would be 45% on the income.

If you do anticipate that much profit, start with the Ltd from the beginning.
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