Beware Tax Planning Models Using LLP’s

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If you are being advised to use an LLP as a stepping stone towards incorporation then you have good cause to be wary.

There is a business model which is doing the rounds at the moment which relies on a piece of legislation which was created to deal with CGT on the liquidation of an LLP. However, this legislation is being abused and in my opinion it will not be long before HMRC comes down on it like a ton of bricks under their General Anti Abuse Rules in GAAR legislation.

When property is transferred into an LLP there can be no SDLT or CGT payable. That is a fact.

It is also a fact that if the partnership geuinly fails and is liquidated then the base costs for calculating CGT is the value of the properties at the point they were transferred into the LLP.

At face value this is all great news because at the time the properties are transferred to the LLP they may well be worth considerably more than they cost to acquire.

However, if you enter into a LLP with the sole intention of liquidating it at a later date to avoid tax that is without doubt abuse of the tax system and HMRC are going to be far from happy about it. My concern is that 1,00’s of LLP’s are currently being formed for exactly that purpose.

It doesn’t take a rocket scientist to see how HMRC will see straight though this.

If you form an LLP today, liquidate it after say one year and then a company, which has exactly the same owners miraculously decides to acquire the same assets it is pretty obvious what has occurred.

If this structure has pitched to you please consider very carefully what I have said above. You could find an unwelcome tax demand on your doormat for all the CGT you have avoided at some point in the weeks, months or even years after you have liquidated.

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