To LLP or Not to LLP: A Guide for UK Asset Management Start-Ups
December 12, 2024
A common first issue tackled by many looking to set up a new UK investment manager is whether to establish the management vehicle as an LLP or a limited company. This article, written by the Dechert London Global Tax team, provides a high-level summary of certain key factors to consider when assessing the relative merits of the different business structures.
Following its introduction in 2001, the LLP quickly became the vehicle of choice for those looking to start an assetmanagement business. Offering the protection of limited liability, along with the flexibility and tax-planning possibilities of a partnership, this was, in most cases, a clear choice. However, as explained further below, many of the historic advantages of the LLP have eroded in recent years, leaving many of today’s new managers with a genuine dilemma.
LLPs were the default option for asset managers for several reasons. The table below provides a high-level overview of the historic advantages and disadvantages of an LLP relative to a limited company. In contrast, the table towards the endof this article summarises the current advantages and disadvantages.
NICs Savings
In many cases, the principal benefit of using an LLP is the ability to treat highly remunerated individuals as self-employed for tax purposes. The resulting absence of employer National Insurance Contributions (NICs) on allocations of LLP profit shares, as compared to payments of salary or bonus to an employee, offers a significant saving of 15% on remuneration costs (or 15.5% where the Apprenticeship Levy applies). As a result, there is often an immediate and obvious tax saving available with an LLP business structure.
While this advantage remains, the “salaried member” rules, introduced in April 2014, significantly curtail the ability to take advantage of self-employed status for a large proportion of LLP members. In practice, absent careful planning, it may be that in some cases only the most influential or highly remunerated members of an asset management business will be respected by HM Revenue & Customs (HMRC) as self-employed.
A detailed review of the salaried member rules is beyond the scope of this article. In essence, the rules provide that a member will only be respected as self-employed if the member fails one or more of three conditions:
- Condition A: It is reasonable to expect that at least 80% of the member’s remuneration from the LLP will be “disguised salary” (broadly, remuneration that is fixed or which does not vary by reference to the profits of the LLP as a whole).
- Condition B: The member does not have “significant influence” over the affairs of the LLP.
- Condition C: The member’s capital contribution to the LLP is less than 25% of the total amount of the member’s disguised salary.
It is rare for members of asset management LLPs to contribute significant capital. As a result, junior members of the partnership who carry little influence and whose remuneration is largely fixed or based on personal or divisional performance, generally will not be respected as self-employed; therefore, PAYE and NICs will apply. Recent HMRC enquiries suggest that the salaried member rules are high on HMRC’s list of priorities in the asset management sector. Consequently, taking an aggressive interpretation of the salaried member rules is not recommended. Despite the salaried member rules, the potential absence of employer NICs remains a significant benefit of establishing as an LLP.
Planning Possibilities
Prior to the introduction of the salaried member rules, as well as the “mixed member” rules that also became effective in April 2014, many asset management businesses took advantage of the partnership structure offered by an LLP to implement a variety of tax planning measures. As further explained below under “Tax-Efficient Profit Retention / Reinvestment”, the introduction of the mixed member rules largely eliminated planning designed to take advantage of the lower tax rate paid by corporate members. Contributing factors to the significant decline in the use of LLPs for tax planning purposes include: a proliferation of other anti-avoidance provisions; some notable HMRC successes in challenging tax avoidance structures in the courts; a strengthening of public sentiment against tax avoidance; and many managers’ unwelcome experience of the time, expense and distress involved in responding to HMRC enquiries.
Reduced Overall Tax Cost
The table below shows a highly simplified comparison of the taxation of profits realised in an LLP and in a limited company for a UK resident individual. For illustrative purposes, the table assumes that: all profits are distributed by a company in the form of dividends (as opposed to salary or bonus, which are taxed at higher rates but tax deductible against corporation tax), corporate taxes are paid at the highest rate, and all taxes are paid on dividends/profit share at the highest rates (disregarding any lower marginal rates of tax). While this may be a simplistic exercise, and much will depend on personal circumstances, the illustration suggests that an LLP potentially offers a significant tax saving for individuals proposing to distribute all profits in full.
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