Budget: LLP’s in liquidation – changes to capital gains tax treatment

Draft legislation unveiled at the Autumn Budget seeks to tax limited liability partnership (LLP) members on their contribution of assets to an LLP in circumstances where the member (or a person/company connected to them) subsequently receives those assets back from the partnership on a liquidation. This article examines the changes alongside the recent decision in GCH Corporation Ltd & Ors v HMRC, which highlights the tax planning the legislation has been introduced to counter.

Currently, when a liquidator is appointed to an LLP, that LLP loses its tax transparent nature. (Broadly the LLP and the member are no longer treated as one and the same, so moving assets between them becomes taxable). Before this point, the tax transparent nature of the LLP allows assets to be contributed to the LLP by a member without there being a disposal for tax purposes. Provided an LLP is carrying on a trade, profession or business with a view to a profit, it will typically be treated as transparent for UK tax purposes.

Under current enacted rules, once the LLP becomes opaque on the appointment of a liquidator, it is treated as having acquired the asset on the date it was contributed to the LLP at its market value on that date. A subsequent disposal of the asset by the LLP (including to a member) is a disposal for capital gains purposes, chargeable to corporation tax. 

Consider an asset acquired by a member in year one for £100. In year two, the market value is £200 and the member transfers it to the LLP. In year five, the LLP is liquidated when the asset is worth £500 and subsequently transferred back to the member. The taxable gain on the LLP’s disposal is £300, being the difference between the market value when it acquired the asset and the market value when it disposed of the asset. The member now has an asset with a base cost of £500, rather than £100 and only £300 has been subject to tax.

The draft legislation effectively makes the loss of the tax transparent nature retrospective (albeit the tax point is when the LLP disposes of the asset) This means that, on the original contribution of assets by the member, the LLP is deemed to be opaque and a disposal occurs. In our example above, the LLP continues to be taxed on the £300 gain, but the member is also subject to tax on £100, being the difference in value of the asset between year one and year two. The member now has an asset with a base cost of £500, rather than £100, but the difference of £400 has all been subject to tax. 

Once enacted, this legislation will be effective from 30 October 2024 (but will not apply to LLPs where a liquidator had already been in place at that date). 

The recent tax case GCH Corporation Ltd & Ors v HMRC highlights the planning that the Government is seeking to address. In this case, loan notes were issued to a company and three trusts who subsequently contributed them to an LLP, which was then liquidated and the loan notes were transferred back to the members. The business of the LLP was defined as "acquiring, holding and selling shares, securities and other assets”. HMRC sought to argue that, as the tax transparent treatment only applies to LLP’s carrying on a trade or business with a view to profit, then the LLP had always been opaque (including at the time of contribution) and therefore tax was due on the original disposal from the members to the LLP. The court found in the taxpayer’s favour, namely because whilst the LLP wasn’t trading, it was carrying out a business and the fact that the business was investment did not change this analysis (a notable point for LLP’s). For similar cases going forward, HMRC will now have a statutory basis to bring the original contribution into charge. 

LLPs and members should take the rules into consideration when planning to contribute assets to an LLP and when structuring a future exit or sale.

For further information please contact:

• Richard Green
• Amy Davis