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Will new tax rules spark trend for wealth LLPs to incorporate?

by Danielle Levy on Feb 11, 2014 at 11:02

Will new tax rules spark trend for wealth LLPs to incorporate?

Changes to the way partnerships are taxed could spark a trend of wealth and fund management limited liability partnerships (LLPs) moving to incorporate.

This warning came from think tank New City Initiative (NCI), which found half of its members that are structured as LLPs would consider incorporating as a result of HMRC rules that come into force by 6 April.

The NCI counts well known boutiques such as Vestra, Stanhope Capital and Dalton Strategic Partnership among its members.

If the proposed tax changes to limited liability partnerships go ahead, it will mean some partners:

- are identified as employees for tax purposes unless they can demonstrate they have significant decision-making powers within the firm;

- are subject personally to the equity and capital risk of the firm; and

- have their own remuneration tied to the profitability of the business.

Change of status

The proposals also aim to prevent the allocation of profits to a non-individual partner (for example, a trust or corporate) as way to defer or reduce an individual member’s personal tax liability. The rules were initially designed for professional services LLPs rather than asset managers as a way to crack down on partners, often junior, who HMRC believes should be treated as employees.

Some executives are warning the rules could result in profound unintended consequences for the financial services industry, not least a shift away from a structure that reduces systemic risk and aligns interests.

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