Usually, a limited liability partnership (LLP) is treated like any other partnership for tax purposes. That means that the capital gains and income of the LLP is ‘looked through’ so that it is assessed individually on the LLP members.
These rules go out of the window if the LLP is not carrying on business with a view to profit, or is in liquidation. If this is the case then the LLP will be treated for tax purposes as a company. This means that any profits will be subject to corporation tax at the level of the LLP and the members will potentially crystallise a capital gain in respect of the distribution of surplus assets. This gain will be calculated as the proceeds from liquidation distributions less any capital contributed to the LLP.
It is often assumed that such a gain in the hands of an LLP member will be subject to Entrepreneurs’ Relief. If a company ceases to trade and then is liquidated within three years of cessation, Entrepreneurs’ Relief should apply if the conditions for the relief were met on the last day of trading.
Although there are rules which allow Entrepreneurs’ Relief to be available for a disposal of a partnership interest, these do not help us when an LLP is liquidation because tax rules dictate that it is not to be treated as a partnership for tax purposes at that point.
Although an LLP does meet the definition of a company for tax purposes (and so could potentially fall within the company Entrepreneurs’ Relief rules) it is not altogether clear to see how the company definitions can be met. For example, how do we prove that the member was an ‘officer or employee’ of the LLP in the final year of trading? How do we show that the member had 5% of share capital? The definitions do not fit neatly into an LLP scenario.
It may be worth members who are in this situation, seeking clearance from HMRC that Entrepreneurs’ Relief applies. HMRC have not published their views on this subject. Alternatively the basis of any claim should be set out in the member’s tax return.
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