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EXPLANATORY NOTE
NEW
CLAUSE 17
NEW SCHEDULE 2
LIMITED LIABILITY
PARTNERSHIPS: INVESTMENT LLPs AND PROPERTY INVESTMENT LLPs
SUMMARY
1.
The purpose of the New Clause and schedule is to prevent tax loss
through investment and property investment limited liability partnerships
(LLPs). Exemptions for income and gains will not apply for pension
funds, the pension business of life insurance companies and the tax
exempt business of friendly societies where the income and gains are
received in their capacity as a member of a property investment LLP.
Individuals will not be able to obtain interest relief on loans to
buy into an investment LLP.
DETAILS
OF THE CLAUSE
2.
Subsection (1) applies the changes in New Schedule
2 to the relevant chapters of the Income and Corporation Taxes Act
1988 and the Taxation of Chargeable Gains Act 1992 in relation to
limited liability partnerships whose business consists wholly or mainly
in the making of investments.
3.
Subsection 2 brings the provisions of the schedule into
force from 6 April 2001.
DETAILS OF THE
SCHEDULE
4.
Paragraph 1 introduces the definitions of investment
LLP and property investment LLP by adding section 842B to the Income
and Corporation Taxes Act 1988 (ICTA). The definitions are introduced
to the indices of terms in ICTA and TCGA.
5.
Section 842B(1)(a) defines an investment LLP. The words
closely follow the definition of investment company at section 130
ICTA 1988 so that the case law and guidance relating to the definition
of investment company may be applied to LLPs.
6.
Section 842B(1)(b) defines a property investment LLP
by building on the definition of investment LLP. The legislation
refers to investments in land and here “land” has the meaning given
by the Interpretation Act 1978 so that it includes “buildings and
structures, land covered with water, and any estate, interest, easement,
servitude or right in or over land”.
7.
Section 842B(2) provides for the LLP to be treated as
an investment LLP or a property investment LLP for each period of
account. As when considering section 130, a representative period
will need to be taken to form a view of whether the principal part
of income is derived from the business so that a LLP is an investment
or property investment LLP, but that view will then apply for the
complete period of account.
8.
Paragraph 1(2) inserts references to the definitions
of investment and property investment LLPs into the index of terms
at section 832(1) ICTA.
9.
Paragraph 1(3) inserts references to the definitions
of investment and property investment LLPs into the index of terms
at section 288(1) TCGA.
10. Paragraph 2
of the schedule introduces a new section 659D to ICTA so that pension
funds are taxed on the income and gains they receive in their capacity
as a member of a property investment LLP.
11. Section 659D(1)
disapplies the exemptions from income tax for income received by certain
pension schemes or funds on investments, deposits or other property
that they hold as a member of a property investment LLP.
12. Section 659D(2)
lists the various statutory provisions providing for exemption from
income tax which are to be disapplied by section 659D(1).
13. Section 659D(3)
clarifies that the disapplication of exemptions from income tax in
subsection (1) extends to income from relevant stock lending fees
(within the meaning given by section 129B).
14. Section 659D(4)
ensures that futures and options within section 659A are to be treated
for the purposes of subsection (1) in the same way as if they were
an investment so that tax exemptions are disapplied.
15. Paragraph 3
amends section 686 ICTA so that pension funds are taxed at the rate
applicable to trusts on the income received as a member of a property
investment LLP.
16. Paragraph 3(1)
provides for section 686 ICTA to be amended.
17. Paragraph 3(2)
amends section 686(2)(c) by introducing a proviso that the exemption
from the rate applicable to trusts provided by the section for income
from investments, deposits or other property of certain pension funds
or schemes is subject to the new section 686(6A).
18. Paragraph 3(3)
inserts new section 686(6A) to make clear that the exemption from
the rate applicable to trusts does not apply where the assets are
held as a member of a property investment LLP.
19. Paragraph 4
inserts a new subsection into section 271 Taxation of Chargeable Gains
Act 1992 (TCGA) to disapply exemptions from capital gains tax gains
accruing to certain pension funds or schemes from the acquisition
and disposal of assets held as a member of a property investment LLP.
20. Paragraph 5
inserts two new sections into ICTA, section 438B and 438C, so that
insurance companies are taxed on the income they receive in their
capacity as a member of a property investment LLP even where the income
is referable to their pension business. In order to provide a charge
to tax corresponding to that applying to self administered pension
schemes (see paragraphs 10 to 14 above), sections 438B and 438C override
the provisions in Chapter I Part XII ICTA which would otherwise exempt
income accruing for the benefit of pension business policy holders.
21. Section 438B(1)
provides that the policy holder’s share of any income and gains a
life assurance company receives as a member of a property investment
LLP which is referable to its pension business is instead treated
as referable to its basic life assurance and general annuity business
(BLAGAB). The effect of this is that the income and gains are charged
to corporation tax, rather than being exempt by virtue of section
438(1) ICTA.
22. Section 438B(2)
to (4) are based on the provisions of section 441B(2A) to (4)
ICTA, which provides that certain income from land otherwise referable
to overseas life assurance business is treated as referable to BLAGAB
to enable it to be charged to corporation tax. Subsection (2) treats
the income from a property investment LLP to which subsection (1)
applies as income from a Schedule A business separate from any other
the company is treated as carrying on.
23. Section 438B(3) makes a company that does not actually
carry on BLAGAB taxable as if it does, if any income or gains are
attributable to BLAGAB under this section.
24. Section 438B(4)
allows tax to be charged under the section under Schedule A even if
the company is charged to tax under Case I of Schedule D in respect
of its life assurance business - for a life assurance company Schedule
D Case I overrides Schedule A by virtue of section 83 FA 1989.
25. Section 438B(5)
keeps the income and gains outside the calculation of relevant profits
and BLAGAB profits which determine the rate of tax charged on the
company’s other income and gains. Instead the section stipulates
that the whole of the income and gains are charged to tax at a rate
of corporation tax equal to the basic rate of income tax - the same
rate at which policy holders’ Schedule A income and chargeable gains
are normally taxed.
26. Section 438B(6)
ensures that the property income from an LLP does get included
in the Case VI computation of pension business profit.
27. Section 438C
defines what is meant by the policy holders’ share. Here the model
is section 804A ICTA.
28. Section 438C(1)
provides that the “policy holders’ share of any income and chargeable
gains” is the amount that is left when the shareholders’ share is
deducted.
29. Section 438C(2)
gives a formula for determining the shareholders’ share. The numerator
is the profits of the company from its pension business, and the denominator
is the total investment return less expenses from that business.
This fraction of the income is deducted from the whole income to find
the policy holders’ share.
30. Section 438C(3)
& (4) provides rules for what happens if either part of
the fraction is nil, or the fraction exceeds unity.
31. Paragraph 6
amends section 804B of the Taxes Act so that property income from
an LLP arising to a life assurance company is properly attributed
to the correct category of business when any foreign tax on that income
is attributed among the various classes of business.
32. Paragraph 7 substitutes
a new section 545(3) in the Capital Allowances Act 2001. This ensures
capital allowances on plant in a building are attributed to BLAGAB
where the income from letting the plant in the building is property
income from an LLP arising to a life assurance company falling within
section 438B in accordance with paragraph 5.
33. Paragraph 8
Friendly societies that write insurance business may do so on a basis
which exempts some or all of their income from corporation tax. They
could then enjoy the same benefits as pension schemes of life assurance
companies with pension business in the absence of provisions to remove
the exemptions.
34. Paragraph 8(1)
removes the exemption given in section 460 from corporation tax that
a friendly society writing tax exempt life or endowment business enjoys
where it receives income or gains from a property investment LLP.
35. Paragraph 8(2)
does the same thing where a registered friendly society which is exempt
from tax by virtue of section 461 on other business (that is, insurance
business which is not life or endowment business, such as sickness
business).
36. Paragraph 8(3)
applies where the exemption from tax is given by virtue of section
461B - this applies to incorporated friendly societies with other
business.
37. Paragraph 9
amends section 362(2)(a) so that interest relief will not be given
on loans to buy into an investment LLP, in the same way that interest
relief is not given for loans to buy into a limited partnership registered
under the Limited Partnership Act 1907.
38.
The Limited Liability Partnership Act 2000 introduced an additional
choice of corporate vehicle through which to carry on business. Those
firms that choose to use LLPs will enjoy the organisational flexibility
and, in general, the tax status of a traditional partnership but,
unlike a partnership, its members will have limited liability. It
is thought that LLPs will be particularly attractive to professional
partnerships but the intention is that they will be available to all
businesses. The rules governing the incorporation and conduct of LLPs
are set out in the LLP Act and the regulations made under that Act.
Details of the LLP Act and the regulations may be obtained from the
Department of Trade and Industry. Information is available on the
internet at http://www.dti.uk/cld/llpbill/index.htm
39. The LLP Act introduced
tax legislation to ensure that in general LLPs carrying on a trade,
profession or other business with a view to profit would be treated
for tax purposes as partnerships. The accompanying New Clause 16
amends some of that legislation to give more explicit rules to ensure
that the legislation fully meets its purpose in all respects.
40. The provisions in this
clause and schedule concerning certain members of property investment
LLPs are designed to prevent tax loss and to avoid the distortions
to investment that would follow if LLPs were developed to provide
a corporate tax-transparent property investment vehicle with tradable
interests. The provisions will not remove a current tax advantage
because they will apply from 6 April 2001, the date when LLPs will
first become available.
41. The provision preventing
relief on loans to buy into an investment LLP will prevent tax loss
and avoid distortions to investments patterns that would be driven
by tax relief. The provision will restrict interest relief for members
of investment LLPs in the same way that interest relief is currently
restricted for limited partners in a limited partnership registered
under the Limited Partnership Act 1907. Limited partnerships are
typically used for investment.
42. Guidance on
the taxation of LLPs which carry on a trade or profession was included
in Issue 50 of Tax Bulletin published in December 2000. This guidance
is still current. Tax Bulletin is available on the Inland Revenue
Website at www.inlandrevenue.gov.uk/bulletins
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