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bigduckontax
bigduckontax, Accountant
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We are setting up our family business as an LLP to bring me

Resolved Question:

We are setting up our family business as an LLP to bring me and my sibling in (was previously a normal partnership between my parents) and trying to decide if we include the land and property the business is run from in the LLP or not (or continues to remain part of my parents assets and excluded).

We would like to understand the financial implication of both scenarios:

The company's Land and building is worth approx. £170K (split between 50/50 between me and my sibling on inheritance).

Other assets we would inherit outside of this would be:

i) my parents share in the company

ii) my parents are currently living in rented accommodation but expect to purchase a house approx. £400 – 450K this year (would again be split 50/50 between me and my sibling on inheritance).

Therefore max. value of fixed assets split between both should be within the £325k inheritance tax threshold per person (we’re aware the fixed assets could appreciate over time & thresholds could change).

If the land and property of the company remained owned by my parents rather than in the LLP it would then be ring-fenced from the LLP and provide a guaranteed income/ pension to them, regardless of the future success of the company as property could be rented out (although the expectation is for the company to continue as a going concern).

Considerations:

1) Is there any CGT (or any other tax) implications of the land and buildings coming into the LLP, or later if we need to sell the property/ land compared to if it was kept outside & just owned by my parents. Or any implications to when my parents pass away? Would we be worse off by doing this?

2) If it is included in the LLP can the land and property (benefits/ entitlement) be split 50/50 between my parents only  in the LLP agreement (until we inherit their share at a later date)? Is there any tax implications to doing this? We are trying to ascertain if it is better to include or exclude the property from the LLP or not.

Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I'm Keith and happy to help you with your question.
If you bring the property into the LLP then, although there would be a CGT liability on transfer, it would almost certainly be deferred using Roll Over Relief. That only postpones the tax until a sale at some future, undetermined date.
I would be inclined not to bring the property in to the LLP. It would take a valuable asset away from parental control and who knows what might happen in the future. Should the LLP become insolvent then the property could be seized by creditors and your parents have no recompense. Your inheritance would have gone down the Swanee also. Much better keep it outside the Partnership and your parents rent it out to the LLP.
Finally don't gamble on an inheritance. Your parents might develop a dislike to you and bequeath their possessions elsewhere. Unlike Scotland, where I live, there is no statutory limit as to disposals on decease. I see you are aware of the Inheritance Tax (IHT) limits, it is at a flat 40% over the 325K limit, but drops to 36% if more than 10% of an estate is bequeathed to charitable beneficiaries. Parents can inherit the unused portion of a deceased's spouse's IHT allowance.
I do hope I have helped you with your query.
Customer: replied 1 year ago.
Thanks Keith.
How much would the capital gain liability roughly be ? If the land & property went up in value presumably we would also have to pay CGT then too? If say the property was transferred at £170k and in 10 years time we sold it for 300k what would be the tax liability be (a) to put it into the LLP b) if we later sold it)
Is there any implications for it being in the LLP but in the agreement 50/50 benefits going to my parents only?
Take your point on the inheritance piece. One of my parents has a developing condition. One of the attractions of the LLP is the property can't be passed to anyone else at a later date. If left outside the LLP is there any way we can prevent this from occurring as key to the business?
Expert:  bigduckontax replied 1 year ago.
Before I can respond I need to know the original purchase price of the land and buildings plus any improvements made eg installation of double glazing, central heating, extensions but not routine repairs.
Customer: replied 1 year ago.
Hi, Keith, this is hypothetical so let's say bought for £100k with no improvements made.
if stayed outside the LLP would any taxes have to be paid ? Just trying to gauge the tax impact if it's in or out..
Expert:  bigduckontax replied 1 year ago.
Right, then the gain would be 70K if it were transferred, but presumably Roll Over Relief would be used to postpone the gain of 70K.
Final disposal at 300K would be a gain of 200K.
CGT would be at 18% or 28% depending on the income including the gain of each individual member of the LLP on disposal. The gain would be split amongst the partners in accordance with the partnership agreement. Sell before the LLP forms is a worst case scenario of 19.6K tax, if sold 10 years hence the tax could be 56K.
Please don't think that the property cannot be disposed of if it is within a LLP. It could be if all members agree and, were there a rogue member within, it might just slither out.
Whichever way you turn you will be caught by Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. On sale CGT will rear its ugly head. I know of once case where a parent lent a son money to buy a house. He had himself put on the deeds. When he transferred his share to his son it cost him 36K of CGT, ouch.
Customer: replied 1 year ago.
Many thanks Keith.
So if my parents transferred premises to the LLP they wouldn't have to pay CGT (due to rollover relief) on the 70k. When would they have to pay CGT on this? And what if they died is this CGT due just written off or offset by anything inherited if still hadn't been paid (as all outside the LLP)?
Expert:  bigduckontax replied 1 year ago.
Yes, providing they were members of the LLP. Otherwise there would be a disposal for CGT and a gain on 70K, worst case scenario a tax bill of 19.6K.
If Roll Over Relief is taken it merely defers the gain until the ultimate sale at some future, undetermined date.
On death there is no CGT, the value of the buildings, were they still to own them, would be aggregated with their assets and exposed to Inheritance Tax (IHT) which is at 40% flat rate on any surplus over 325K. If 10% of the bequests are charitable then the rate drops to 36%. Inter spousal transfers are outside the scope of IHT and spouses can inherit the unused portions of their deceased spouse's 325K also.
Customer: replied 1 year ago.
Thanks Keith - this is very helpful.So by the sounds of it, in or out of the LLP no CGT unless we chose to sell the assets at a later date (either my parents if they kept it or the LLP if it was transferred in) The real consideration is if in the LLP if the company goes under we lose the premises.You mention my parents getting rollover relief only if they are in the LLP.If the property isn't split 50/50 between my parents in the LLP but instead 25% between me, my parents & sibling does that matter/ do they get the same rollover relief - as essentially they 'own' less of it in the LLP?One final question; if me and my sibling decided to sell the land in the LLP (if parents had passed away and premises were left to us) what tax would we pay? Would it come under Inheritance tax or capital gains? I think the inheritance of their share of the business would come under inheritance tax, then if we later sold the premises we would pay capital gains on the value i.e when the premises were transferred into the LLP, say £170k - (rather when they passed away) vs. what it was sold at).
Expert:  bigduckontax replied 1 year ago.
Yes, you are correct in your surmise, but to get the Roll Over Relief your parents would have to be part of the LLP. Otherwise it would be a disposal and trigger CGT as I explained.
Customer: replied 1 year ago.
Sorry Keith - I am nearly there!
So we would receive rollover relief relating to the whole asset if later sold by the LLP even if my parents now only 'owned' say 25% each of it.
If my parents passed away me and my sibling could take the premises out of the LLP (say if the business wasn't doing well) and 'sell/ transfer' it to ourselves and would also receive rollover relief and not pay CGT until we later actually sold it.
Expert:  bigduckontax replied 1 year ago.
Were it sold your parents would receive only their share of the LLP's receipt in the transaction. CGT would kick in at that point assuming that Roll Over Relief had been used. I think it most ill advised for your parents to allow the LLP to take the property and thus loose control. Much better retain it in their own hands and rent it to the LLP. Suppose the LLP is really in trouble, to transfer the property out might create a fraudulent preference. My advice is for your parents not to transfer to the LLP at all.
Customer: replied 1 year ago.
Thanks Keith. It seems like the CGT piece may be negligible once we factor in IH and rollover relief.
The over riding factor for us is to protect the premises (as key to the success of the family business) as one of my parents have a condition we wouldn't want them to sell or leave their share of the premises to someone outside the family without everyone else's knowledge. It sounds like we can have more protection in a LLP agreement to safeguard the premises but without having a huge tax implication. Do you agree?
Expert:  bigduckontax replied 1 year ago.
I can see which way this cat is jumping and accept that from the businesses's point of view bringing the property into the LLP is a logical step to secure an essential asset.
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Category: Tax
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Customer: replied 1 year ago.
Thanks for the above
Expert:  bigduckontax replied 1 year ago.
Delighted to have been of assistance.Please be so kind as to rate me before you leave the Just Answer site.

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