If so, should you introduce Corporate Partners?
In the next few years we expect to see more partnerships and limited liability partnerships (LLPs) introduce companies as partners. This article summarises the main benefits of having corporate partners and will help you decide whether you should consider their use.
The rest of this article refers to partnerships and partners, but it applies equally to LLPs and their members.
What are the main tax benefits of having a corporate partner?
- The profit paid to the corporate partner will often be taxed at the small companies corporation tax rate, currently 21%. This compares to the highest marginal tax rate for partners of 51% (from April 2010).
- The shareholders of the corporate partner decide how much of the profit to distribute to themselves.
- The retained profit in the corporate partner remains untaxed until paid out e.g. on the selling of the shares or on a winding up in the future. Given current capital gains tax rates this could be at a tax rate as low as 10%.
- There will be significant savings where loan finance is introduced. An example of the potential savings to be made is in the box on the following page.
How is a corporate partner introduced?
- An individual partner sets up a new company.
- The company becomes a partner in the partnership.
- The company invests in the partnership and gets a profit share from the partnership in return.
Should you set up companies for all partners?
We are aware that some professional advisers are advocating the use of corporate partners for all partners in large firms, giving the following structure:
Although there is logic behind this and if you are careful, definite tax benefits, in our view this structure is impractical for larger partnerships.
When are corporate partners practical?
We see corporate partners being most beneficial and practical for partners looking to retire within two to three years. It is especially suited to partnerships within the service sector, such as solicitors, vets, estate agents, architects etc.
The introduction of spouses as corporate partners, either before or after retirement, can also be beneficial.
Are there any drawbacks?
As with all tax planning there are non-tax issues to consider, and here these include a need for a lot of attention to detail to ensure the structure is robust, commercial and effective.
This is a big topic, and it is vital to obtain sound and relevant professional advice before proceeding. Otherwise you could run into problems with:
- IR35 regulations (this is the legislation that treats a company as if it were an employee of the company).
- the associated company rules (which reduce the thresholds for the small companies rate of corporation tax).
- Settlement legislation.
- anti-avoidance rules.
For more information please get in touch with your usual Hazlewoods contact or email: tax@hazlewoods.co.uk.
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Example of the savings to be made from the use of a corporate partner for obtaining loan finance
If a person borrows £500,000 with an interest cost based on a five year term of £100,000, the total tax cost of repaying it will be:
£469,408 if undertaken purely as a partnership (assuming a marginal tax rate of 51%)
£111,911 if using a corporate partner
Giving an overall tax saving of £357,497