UK LLP versus LTD versus Hybrid Structure

[SpiderWoman]

Hi,

Regarding taxation in UK, if the goal is to capitalize the maximum of profit, what is the best structure per level of profit?
Why some traders choose Hybrid partnership struture?
My question is addressed to professional traders, who used to run one of those type of company.

Thanks

 

[scose-no-doubt]

You can swerve income and corporation taxes at the top rate by cleverly apportioning part of your profits through the LLP. You can also claim expenses pension expenses for tax deduction through LTD occupational scheme and get a basic rate extension for paying into private pension from your dividend distribution. When you've built up a nice asset base in your LTD (be careful not to falter and get yourself classed and a closed investment company) you can get entrepreneurs relief on disposal to a third party and pay 10% legit as you walk off into the sunset. Those are the simplest benefits but there's always more complex stuff if you're willing to pay for it. Whether any of this is worth it depends on how much you're making.

 

[SpiderWoman]

thanks Scose-no-doubt, "it depends on how much you're making", could you do a response per level of profit and develop your idea about the "closed investment company"?
I would prefer a pragmatic response with numbers for more consistency.

 

[scose-no-doubt]

Well your small companies rate for CT is 20% moving to main rate 28% for profits in excess of £300k per annum so essentially you're using that rate when you're allocating the LTDs share of the profits. This is beneficial if you're paying the 50% rate but you have be prepared for administration costs and all the rest of the p1ssing around.

Your cash profits are held as an asset of the close company you own which is where you can run into problems with being classed as a closed investment company -which will mean you pay the main rate of CT- as you can be earning quite a bit of interest or you may decide to invest the cash assets (including real estate) for yield.

Also, it's worth noting that extracting the cash *cough cough* tax free from the limited company can be very, very tricky... and expensive. The alternative is to manage and minimise your day-to-day cash flow needs and use the company as a mechanism to save and invest for a big sell off as a capital asset giving rise to Entrepreneurs Relief - which you won't get if you're classed as an investment company.

Alternatively you can go through the hubub of going limited, getting FSA registered and paying a bloodsucker aka solicitor to sort out a constitution that allows you to trade on behalf of eh company. You'd then have to argue the toss with HMRC to ensure you weren't classed as an investment company. Lots of tax erm... "avoidance" measures for Ltd's but as I said... expensive and often involving some sort of offshore vehicle. Obviously cost/benefits again.

 

[SpiderWoman]

The risk to be reclassified as "close investment holding" appears with an excess profit > 300 K?

 

[donaldduke]

The high/main rate of corporation tax is currently 25%, falling to 24% next year and 23% in 2014.

There is a rumour Osbourne may plan to it drop to 20% in next months budget.

 

[SpiderWoman]

I found this definition http://www.hmrc.gov.uk/manuals/ctmanual/CTM60710.htm for "close investment holding"

 

[scose-no-doubt]

@Donalduke - It's 26% moving to 25% in April sorry. I'm always behind because accounts are done retrospectively. Oversight lulz!

@ Spiderwoman - HMRC messes with which of the CT definitions applies to you based on the structure of your balance sheet and what they think they can get away with. E.g. if you had 40% land 60% bonds they will treat the company as though it's investing as bonds. I had a client that HMRC tried to class as an investment company because they were holding substantial profits as cash in an offshore account and were earning a lot of interest. You need to be ready for anything once they get their mitts on you. You just need a good tax advisor to sort you out. Have a look for a practice that specialises in trading and I'm sure they'll be able to help you out. I'm not the guy to ask for this sort of thing unfortunately.

 

[donaldduke]

Alternatively you can go through the hubub of going limited, getting FSA registered and paying a bloodsucker aka solicitor to sort out a constitution that allows you to trade on behalf of eh company.

I didnt think you needed to be FSA registered to trade through your own Ltd company??

Also instead of instructing a solicitor I (as the director) just passed a written company resolution saying the company was going to trade futures (on margin) and it was authorising me to do so. That was all the paper work IB wanted from me.