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bigduckontax
bigduckontax, Accountant
Category: Tax
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1) a LLP is set up to buy a property, redevelop then sell

Customer Question

Hi
1) a LLP is set up to buy a property, redevelop then sell the property and wind down the LLP . Partners have put in capital to finance the the project with some bank lending
2) The majority of the partners want out as the property is taking longer to sell. A partnerA has agreed to pay out (buy out) the other partners based on a guide price - before the actual property has been sold. Once the property is sold by Partner A -How would the tax be handled
Is the partner A technically buying other partners out as a capital gain or is it profit ? Companies pay tax at the same rate for income and capital gains. However individuals would pay tax at different rates - this is the issue
3) What would be the way to handle this tax wise.
a) The partners take the payout/buyout as profit
b) or is it a capital gain as share is being bought as the property is unsold.
So,
What is the most tax efficient way of paying out the partners before the property is sold
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.
The individuals who dispose of their interest in the project to A are liable to Capital Gains Tax (CGT) on any gain they make in the transaction. Here is HMRC Helpsheet 288 on the basic principle:
'Partnerships (including those carrying on a business as a Limited Liability
Partnership) are treated as transparent for Capital Gains Tax. Each partner
is responsible for returning any capital gains arising on the disposal of their
interests in the assets of the partnership.'
Exactly the same principle applies if the project runs to fruition and the LLP dissolved.
Each individual would have an Annual Exempt Amount of 11K and any gain over that would be taxed at 18% or 28% depending on that individual's income including any gain in the year of sale. It is possible that Entrepreneurs' Relief may apply which would limit the tax rate to a flat 10%. However, HMRC tend to the view that property development, even for one property, is a business liable not to CGT, but Income Tax (IT). This would be levied at the individuals' marginal rate of tax which could be 40% or even 45%.
The situation, as you will see, is rather comples. I would suggest that individuals engage a trusted local professional to negotiate with HMRC on the matter. To much is at stake to try to go it alone unrepresented.
I do hope I have been able to shed some light on the position.
bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 2 years ago.
Thank you for your support.