Back to basics - limited partnerships

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Limited partnerships (LPs) are an efficient structure for investment activity and we see them frequently used in real estate funds, joint ventures and investment structures. The vehicle's appeal lies mainly in its flexibility, its tax transparency, and the limited liability protection it offers investors.

What is a limited partnership?

Unlike a limited company or limited liability partnership, an LP established in England and Wales is not a separate legal entity but instead a type of partnership with special characteristics.

An LP must consist of two or more partners who may be individuals, companies or other vehicles. At least one partner must be a general partner, with all of the remaining partners being limited partners. A person cannot be a limited partner and a general partner at the same time.

General partners and management

The general partner is responsible for the management of the LP, its business and its assets, and has unlimited liability for the debts and obligations of the LP. It is common, however, for the LP to appoint a separate manager which is authorised by the Financial Conduct Authority (FCA) to manage the LP's investments. An LP enters into contractual commitments through its general partner. The general partner is invariably established as a special purpose vehicle, such as a limited company or limited liability partnership, to protect against the potential adverse consequences of its unlimited liability.

Limited partners

Investors in an LP are known as limited partners. The liability of each limited partner is generally limited to the amount of its capital commitment to the LP. A limited partner cannot bind the partnership and must not participate in the day-to-day management of the partnership business. A limited partner taking part in management would lose its limited liability status and become liable as if it were a general partner for as long as its participation in management continued.

How are limited partnerships funded?

LPs are funded by capital and advances from partners, and by borrowings from third parties.

The capital of each limited partner must be registered with the Registrar of Companies. A limited partner's capital cannot be returned until the limited partner ceases to be a partner or the LP is dissolved. However, advances (e.g. moneys loaned) to the LP are treated differently, according to the relevant terms of the advance. For this reason a limited partner's commitment to the LP is typically structured by way of a nominal capital contribution (often 0.001 per cent), with the remainder committed as an advance which is drawn down as and when required by the LP.

LPs may borrow from third parties, as security for which the general partner will usually charge the LP’s assets. Any borrowings incurred do not constitute direct borrowings of the limited partners and recourse will generally be to the LP’s assets only.

How are assets held?

An English LP does not have legal personality separate from that of its partners. Instead its assets are acquired by the general partner acting on behalf of the LP. Typically any property will be held by the general partner and/or nominee companies. Often the LP is combined with offshore feeder vehicles, such as Jersey unit trusts, to enable day-to-day management of the property assets to take place onshore without prejudicing the general tax status of the structure.

Legal framework

LPs are governed by a combination of the Limited Partnerships Act 1907 (LPA), the Partnership Act 1890 and rules of law and equity. Limited reforms were made to the LPA in 2009, and more substantial updates to the statutory legal framework are expected in 2016/2017.

A written partnership agreement will typically govern the terms of the LP and need not be filed at Companies House. If no partnership agreement is entered into, the default statutory framework will apply.

Registration of an LP is straightforward, quick and inexpensive and requires the delivery of a statement of particulars (Form LP5) to Companies House, which will issue a certificate of registration. Certain changes to the LP must be notified to Companies House by submitting a Form LP6.

Tax issues

For UK tax purposes, an LP does not constitute a separate taxable entity and the partners are treated as if they had invested in partnership assets directly. This allows different types of investors to invest together but to be taxed according to their individual status. Each partner is exclusively liable for any UK tax liabilities on income profits and gains arising out of its participation in the LP. Stamp duty land tax issues may arise where an LP holds property directly; contribution of property to an LP and a transfer of an LP interest would trigger a four per cent charge on the gross underlying asset value of the interest acquired or transferred. This can be avoided by including a Jersey unit trust in the structure.

Regulatory issues

An LP will generally be treated as a collective investment scheme (CIS) for UK regulatory purposes, unless it is able to take advantage of an available exemption. Where an LP is classified as a CIS, it will need to appoint an FCA-authorised operator, which may add to the cost of using this vehicle.

An LP may also fall within the scope of the Alternative Investment Fund Managers Directive (AIFMD), which came into force in the UK in 2013. Certain LP structures, such as employee incentive schemes, co-investment vehicles and joint ventures, may fall outside of the AIFMD. Where an LP is within scope of the AIFMD and an appropriately authorised manager has been appointed, there will be no need to appoint a separate operator. Specialist advice should generally be sought in relation to the AIFMD.