CAPITAL GAINS TAX
Ducking and diving with partnerships and LLPs
Partnerships are a bit of an odd beast as far as capital gains tax (CGT) is concerned. The people who wrote the original rules in 1965 didn’t seem to known what to do about partnerships, and it was left to the Revenue to come up with some kind of working regime, which it didn’t do, in fact, until 1978.
So, where you have got a situation that the legislation doesn’t cope with very well, we start rubbing our hands in glee: planning opportunities!
Rather than give you a dry as dust lesson on CGT and partnerships, we’ll go straight to the nub and show a situation where planning can definitely come up trumps.
We’ll start by stating a very important assumption: this is that you want your capital gains to be taxed (if at all) on you as an individual rather than on a limited company you own. This is very topical at the moment, and you will find the subject touched on in a number of other places following on from George Osborne’s first Budget, but our general view, except in fairly exceptional circumstances, is that gains are likely to be much more favourably taxed in the hands of individuals than in those of limited companies. This is important, for reasons that will become clear.
One reason you may want to have a gain accruing to you as an individual rather than to your company is that there are some very important CGT reliefs that only apply to individuals, not companies. The big one, of course, is emigration. While you can emigrate personally and make your gain tax-free while offshore, your company can’t.
Another situation where you definitely want personal gains rather than company gains is if the asset concerned is a property on which you could claim ‘main residence’ relief (even by way of an election deeming the property to be your main residence). Again, companies don’t live anywhere and can’t claim main residence relief.
So having cleared that point of principle out of the way, let’s picture a partnership or LLP which has you as an individual and your company as the two partners. (There can be other partners too, but this scenario is reducing the situation to its simplest, for the purposes of illustration.)
The income that you earn from your business, whether trading or investment, may well be attributed to the company as partner, to a large extent. If the income is anything significant at all, it’s going to pay something approaching half the tax in a company as it would in your own hands.
So, having attributed the income to the company, what do we do about capital gains? The answer is, for the reasons given above, we give the capital gains to the individual partner.
So do you see what’s happening here? The profits that the partnership is making are going towards buying capital assets or paying off mortgages taken out to buy the assets, which is effectively the same thing. Because these profits have only been taxed at 20 something per cent, you can buy more assets, and pay the mortgage off quicker. But any gain that you make when you sell the asset goes to you as an individual and is available for the various reliefs we have talked about. It is likely, in short, that you are achieving the best of both worlds by siphoning off your profits to the company, where they pay less tax, and your gains to the individual, where again they pay less tax.
You can only do this in a partnership that has individuals and companies as partners.