UK limited partnerships – that is limited partnerships established under the 1907 Limited Partnerships Act 1907 and not to be confused with Limited Liability Partnerships or LLPs – have often been a flexible and sometimes hidden gem for combined investment. Many taxpayers may have set up investment structures comprising UK limited partnerships that hold offshore investments (often US based companies) or sometimes UK investment land. However the regulatory burden of maintaining such a partnership in the UK has increased and some limited partnerships are now considering a move to greener pastures offshore. However, making this move can result in a wide variety of tax implications and being caught unawares can prove a recipe for disaster.
PFortunately, these pitfalls can be avoided through awareness and foresight. One structure which I have seen effectively deployed in recent months is the transition from a UK limited partnership to a Guernsey LLP (other offshore partnerships are available) and that forms the basis for my observations below. It is very important, of course, to correctly analyse the nature of the offshore partnership for UK tax purposes.
"...pitfalls can be avoided through awareness and foresight..."
Perhaps I can best illustrate this structure in action through the use of a fairly typical example. A UK limited partnership holds shares in a foreign trading company – it may have UK and non-UK limited partners and those partners may be individuals and companies. The limited partners would like to transfer the partnership assets into an offshore LLP and end operations in the UK. In order to make the change, they decide to dissolve the UK Limited Partnership. At the same time, they direct the shares in the foreign trading company to be transferred into the offshore LLP in return for membership rights in that LLP. This seems simple enough so far, but there are complex tax matters that need to be considered, not least the offshore fund rules (a matter for a post of their own).
While the residence of the limited partnership as a whole is of only limited relevance, the residence of the limited partners is critical. For the partnership, its residence is important mainly when determining whether it is disqualified from double tax relief, whether it is a foreign employer, and where it is resident for the purposes of any relevant double tax treaties. The test here is that of control and management. For the partners themselves, the test used is the standard statutory residence test in the case of individual partners, and for corporate partners it is determined based on their place of incorporation and their place of central management and control.
If the partners are UK-resident, it may be necessary to determine the reasons behind the move for the purposes of the Transfer of Assets Abroad (ToAA) anti-avoidance legislation (ITA 2007 s720 and s737). As recent case law has shown, the ToAA rules are very wide ranging anti-avoidance provisions. They apply where a UK resident transfers assets to an offshore entity and the income accrues to that entity but for the ultimate benefit of the UK resident. If a UK-resident person still has the “power to enjoy” the income which is otherwise payable to a person aboard, then the UK-resident person might be attributed that income and thus be liable to pay tax on it.
So, what can be done? Fortunately, the ToAA rules do allow for a “motive defence”. This defence applies if it would not be reasonable to draw the conclusion from all of the circumstances of the case that avoiding a liability to taxation was the main purpose, or one of the main purposes, for which the relevant transaction was effected. The defence has to be made on a case-by-case basis and will depend on the facts at hand. For example, is the move being made due to a commercial need for a particular regulatory framework and environment? Clearly there would no such defence where the arrangement is part of a bespoke tax planning arrangement. It is also worth noting that if the income is already taxable under other anti-avoidance rules such as the offshore fund rules, the ToAA rules arguably may not apply.
In terms of Capital Gains Tax (CGT), limited partnerships are see-through, and thus the CGT considerations mirror those that would apply if disposals were made by each partner of their fractional shares in the partnership’s assets. In my example where the offshore partnership is treated as a corporate body, the CGT position reflects a disposal by the partners of shares in a non-UK company to a foreign body corporate.
SDLT would be payable if the documents effecting the transfers were executed in the UK, although more typically these would be executed offshore. IHT would not be applicable as there is no disposition intended to confer a gratuitous benefit. VAT is also not applicable.
Finally remember that some bodies are deemed to be companies and the rights of the partners are deemed to be shares. These bodies are collective investment schemes (which could in certain cases include a limited partnership) where property is held on trust. Assuming the shares owned by the limited partnership in the trading company are not held on trust, this potential pitfall is avoided too.
In summary, if the commercial circumstances of a limited partnership’s investments necessitate a move out of the UK and into an offshore partnership, care should be taken to ensure that no unnecessary tax risk or liability is incurred. The key is to consider each tax in turn.