LLM6080 - Conversion: Scottish limited partnerships: tax regulations

There are a number of differences between the rules for taxing partners in Lloyd’s SLPs and those for taxing individual and corporate members of Lloyd’s. These reflect the different commercial structure involved and are set out in regulations 4 to 8 of SI1997/2681.

Deposits provided by partner treated as ancillary trust funds (ATFs) of SLP

Funds provided to satisfy the Lloyd’s Deposit requirement for a Lloyd’s SLP are normally provided piecemeal by the partners involved in proportion to their respective involvement in the partnership. All funds set up in relation to a Lloyd’s SLP are treated as ATFs of the partnership (regulation 5(1)) and the investment income arising on them is accordingly chargeable as trade income. The partnership return will allocate the income on the ATFs to the appropriate partners.

This does not apply where an ATF was originally set up in relation to the underwriting business of an individual member of Lloyd’s and is then made ‘interavailable’ between that business and that of a Lloyd’s SLP in which the individual participates. In such circumstances the income from the ATF remains assessable as part of the individual’s own underwriting business, since the ATF was not set up in relation to a Lloyd's SLP, as required by regulation 5(1). The ATF will only become an ATF of the SLP when the member ceases to trade completely as an individual. This will generally be following the declaration of results of the final syndicates in which the Name traded as an individual. Since the declaration of results generally occurs in May or June, the ATF income of that final year will need to be apportioned between the individual and the SLP.

Earnings basis for partnership profits allocated to individuals

Corporate members of Lloyd’s have all of the elements of their trading result brought into tax on an earnings basis, although special rules are needed to assign syndicate profits to accounting periods. When computing the Lloyd’s trading results of individual Names, this is not so: FA93/S172 (1)(c) provides a form of cash basis for the non-syndicate elements of individual members’ trading results. To keep the partnership return as simple as possible, the earnings basis is applied to non-syndicate related elements of the trading result when computing the trading profits as though the SLP were an individual member of Lloyd’s as well as for the computation as though it were a corporate member (regulation 6(1)(b)(ii)).

No special reserve funds (SRFs)

SLP members of Lloyd’s are not permitted to set up SRFs (regulation 7(1)). Individuals who are partners in a Lloyd’s SLP may not transfer Lloyd’s SLP profits to an SRF. Individuals who are partners in a Lloyd’s SLP and who also underwrite on their own account as individual members of Lloyd’s may only transfer profits from their own individual underwriting to an SRF. All the other rules about their SRF (such as its overall size and timing of withdrawals) are governed by reference to their underwriting as individual members of Lloyd’s alone (regulation 7(2)).

Income not ‘earned income’ for individual partners

Individual partners’ income from Lloyd’s SLPs is not ‘earned income’ (regulation 8), and therefore is not counted towards relevant earnings for RAR and PPP purposes or relevant UK earnings for entitlement to tax relief on contributions to registered pension schemes. In common with income of limited partners generally (BIM72101 – see LLM10000) Class 4 NIC is not charged in respect of this income.

Members of SLPs and LLPs are treated differently in this respect ( LLM6150).