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TaxRobin
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Experience:  International tax
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My business partners and I are looking to invest in an investment

Customer Question

My business partners and I are looking to invest in an investment property together.
That is:
1. we will take income from our company in the form of a dividend.
2. we will use that dividend to purchase a property.
3. we will then receive rental income from the property + any capital gain in the value of the property over time.
We are looking to invest around £100,000 each and there are 4 partners. This question regards ***** ***** implications of the structure that we use to purchase the property. As I understand, we have 2 options :
a. Partnership or LLP
b. Limited company
We are all higher-rate tax payers, and we are each members of one or more limited companies. Therefore company administration is not an issue.
I'm asking you to explain the tax implications in terms of income from the rent and capital gain in both scenarios. Is it the case that one structure is cheaper from a tax perspective than the other, and does this change if the property appreciates beyond a certain level of capital gain?
A comparison calculation would be most useful.
Many thanks,
T.
Submitted: 2 years ago.
Category: Tax
Expert:  TaxRobin replied 2 years ago.
and thank you me to assist you.
I will offer as much information as a forum such as this allows but your personal adviser ( of you) should be consulted.
If you set up a limited company properties, the first and most immediate benefit is the corporation tax band is nil up to a certain amount.
A limited company can also pay out profits in the form of dividends, which do not attract National Insurance contributions at present. Although there is extra tax to pay if you extract dividends, a company can be an extremely powerful tax shelter if you can afford to keep reinvesting profits.
The company is a separate legal entity. It pays its own tax on profits and gains, can be sued debts and is the legal owner of the money it makes. If the shareholders want to take money out, there will be a tax charge. Wages, salaries and bonuses are the most expensive way to get money out of a company, but even so there can be a very significant tax saving and accumulation effect by using a limited company.
An LLP is a body corporate with limited liability and legal personality. It is therefore a legally a type of limited company (but without a conventional share capital) which can function like a partnership in practice. A LLP is fiscally transparent where each partner will be assessed to tax on their share of the LLP's income or gains as if they were partners of a 'normal' partnership.
The benefits of using a LLP to hold new investment properties are:
• Tax transparent i.e. avoids double tax charge to income and gains
• Enables investors to benefit from lower CGT rates
• Flexible in respect of investors’ income and capital shares
• Offers similar protection to that of a company.
I hope this basic information is useful as you pursue your structure choice. I am sure much you may have already known.
Speaking with your own accountants (even though you are all high earners each case is different)about the above as it relates to each of you individually is advised.
Customer: replied 2 years ago.

Thank you feedback.

So I would like to push you on a few of the details please:

1. Will NI be payable on a partners income in the case of a LLP?

2. What capital gain charges are applicable in the case of the Ltd company?

3. What capital gain charges are applicable in the case of the LLP?

4. I expect that there is likely some kind of capital appreciation after which one form is more tax efficient than the other in terms of capital gain, due to the differing limits and rates between a LTD and a LLP.

We understand the tax payable on any rental income that exceeds the maintenance costs in the partnership and the LTD company. What we're not familiar with, is the CGT and how that differs.

Kind regards,

Thomas.

Expert:  TaxRobin replied 2 years ago.
LLP
No employer's national insurance on payment of members’ drawings.
Potentially no capital gains charge if profit/capital sharing ratios are changed.
LTD
The company must take Income Tax and National Insurance contributions from your salary payments.
You can’t count dividends as business costs when you work out your Corporation Tax.
Capital Gains Tax is to the company and shareholders in a Limited Company, while in an LLP, CGT is applicable to members.
As a share of an LLP is treated as a share in a 'normal' partnership, on a future disposal of the partnership the tax treatment would be the same as disposal of a partnership interest.
The main relief trading partnership is Entrepreneurs Relief. On a future disposal of the partnership you may qualify lower rate of CGT.
This will apply only to trading partnerships. If the LLP was classed as undertaking an investment, Entrepreneurs Relief would not be due. This would effectively increase the CGT rate.
Other reliefs that a partner in an LLP may be entitled to include rollover relief and gift relief.
In your situation as high earners you need to remember that the members of an LLP pay Income Tax as self-employed persons, so there is no employers' NI to pay. On the other hand, ALL the profits of the company are regarded as the members' income and are subject to Income Tax. This includes CGT.
In a traditional LTD the Directors are treated as employees of their own company. This means that their salary is subject to personal Income Tax and National Insurance and employers' NI contributions. Profits left in the company (not withdrawn as salary) are subject to the (lower) Corporation Tax rate.
Here is a url that speaks indepth about CGT to partners
http://www.mauriceturnorgardner.com/news-analysis/briefings/2010/01/08/capital-gains-tax-and-partnerships/

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