My client is a member of an LLP which is in liquidation. What are the tax consequences?
A limited liability partnership (LLP) is a body corporate with
legal personality separate from its members, incorporated under Limited Liability Partnerships Act 2000.
As an LLP is a body corporate, statutory provisions exist to ensure that LLPs are treated like partnerships and are transparent for specified tax purposes. For the purposes of income tax and corporation tax, a trade, profession or business carried on by an LLP with a view to profit is treated as if it is carried on instead by its members in partnership; and the property of the LLP is treated for those purposes as partnership property (ITTOIA 2005 s 863; CTA 2009 s 1273(1)). Capital gains are treated in a similar way and tax is assessed and charged on the members separately in respect of the chargeable gains accruing to them on the disposal of LLP assets (TCGA 1992 s 59A(1)).
In certain circumstances, LLPs are not treated as transparent for tax purposes. If the LLP is not carrying on business with a view to profit or is in liquidation, the LLP will be treated as a body corporate for tax purposes. Any chargeable income or gains arising will be liable to corporation tax, payable by the LLP itself.
HMRC’s Capital Gains Manual (at CG27050) states the following in respect of the rules on the liquidation of LLPs:
‘TCGA 1992 s 59A(1) will cease to apply when a liquidator is appointed or, if earlier, on a winding up order by the court or on a corresponding event under the law of a country or territory outside the UK (TCGA 1992 s 59A(4)).
‘When TCGA 1992 s 59A(1) ceases to apply, an LLP will be treated as a body corporate for CG purposes, rather than as a partnership. Chargeable gains arising on disposals of assets by the LLP or a liquidator will be computed as if the LLP had never been treated as a partnership. This will not affect pre-liquidation asset disposals which remain undisturbed.
‘Each of the members will be treated as owning an asset in the form of a capital interest in the LLP. The allowable acquisition cost of each member’s capital interest in the LLP will be determined by reference to their capital contributions as if the LLP had never been treated as a partnership.’
The date on which a liquidator is appointed (or a winding-up order is made by the court, if earlier) will mark the end of an accounting period for the purposes of partnership tax returns and the commencement of a new accounting period for corporation tax.
Neither the commencement of s 59A(1) treatment, nor its ceasing to apply, gives rise to the disposal of any assets by the LLP itself or by any of its members (TCGA 1992 s 59A(6)). Entering into liquidation does not normally trigger chargeable gains, and the base cost of chargeable assets held is retained. However, TCGA 1992 s 156A stipulates that where any previous chargeable gains accruing to a member have been rolled over (under TCGA 1992 ss 152–153) or held over (TCGA 1992 s 154) by reinvestment of the disposal proceeds into partnership assets, those gains are immediately crystallised upon tax transparent treatment of the LLP ceasing to apply, including on entering into liquidation.
HMRC’s Partnership Manual (at PM50550) says:
‘Whilst in liquidation, TCGA 1992 s 59A(5) provides that chargeable gains will accrue to the LLP (in liquidation) on the disposal of any partnership assets, whereas the members will be taxable on gains accruing on the disposal of their capital interests in the LLP. The allowable acquisition cost of each member’s capital interest in the LLP is determined by reference to their capital contributions as if tax transparent treatment of the LLP had never applied.’
The proceeds of disposal of a member’s interest in the LLP are based on the amount of the liquidator’s capital distributions, if any. In calculating the chargeable gain or allowable loss on that disposal, the member’s interest is to be taken as acquired on the date he originally joined the LLP and by reference to the capital cost of his becoming a member (TCGA 1992 s 59A(3)–(6)).
The legislation on entrepreneurs’ relief is set out in TCGA 1992 ss 169H–169S. In the context of a company, frequently the company ceases to trade, a liquidator is appointed and the shareholder qualifies for entrepreneurs’ relief by reference to the last day of trading, provided the disposal takes place within the following three years.
Section 169I(8) deals with disposals of interests in partnerships; it provides that where an individual who carries on a business as a member of a partnership disposes of all or part of his interest in the partnership assets, then that disposal can be treated as a disposal of a whole or part of the partnership business.
However, in the case of an LLP in liquidation, by the time the member disposes of his interest, the LLP is no longer treated as a partnership by s 59A(1), (2).
The definition of a ‘company’ in TCGA 1992 includes any body corporate (TCGA 1992 s 288(1)), so distributions in the liquidation of an LLP will be a disposal of a share in a company (TCGA 1992 s 122) within the entrepreneurs’ relief rules at TCGA 1992 s 169l(2)(c).
In order for a disposal of a share in a company to qualify for entrepreneurs’ relief as a ‘material disposal’, conditions A, B, C or D of s 169I(5) must be met. It may therefore be necessary to show for a distribution in the liquidation of an LLP within three years of the one year period ending when the LLP ceased to be a ‘trading company’ that the ‘company’ was the individual’s ‘personal company’ and the individual was an officer or employee of the company.
This may be difficult to establish, but the position will depend on the facts. HMRC has not published its view on the position.
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