Tax benefit of the SLP: In contrast to a UK limited company, an SLP is tax transparent. No tax is charged to the partnership. Instead the members of the partnership pay tax as if they were investing directly in the underlying asset. Our tax analysis suggests that this underlying investment in a litigation case is likely, although not certain, to qualify for capital gains tax (CGT) treatment for UK tax residents.
So, for a UK resident taxpayer, if CGT tax treatment applies, there is likely to be a significant improvement in the after tax net return. At current CGT tax rates, the investment would incur total tax of 20% ( the CGT tax rate in September 2021), rather than 40% on a full look-through basis. This has the potential to boost investors’ after tax profit by around a third (all else equal).
To illustrate: under the previous approach, where a UK limited company SPV has been setup for each case and issues shares, if a case wins there is corporation tax payable (currently 19%, increasing to 25% from 2023) after which investors are then required to pay CGT. On a full look-through basis therefore for each £100 of profit before tax from a case, a UK tax investor could expect to receive £60 net of corporation and CGT tax (ignoring tax allowances), being £100*(1-25%)*(1-20%). By contrast, investing through a partnership would result in a full look through after tax profit of £80, being £100*(1-20%).
The above applies, provided that the tax authorities accept, as we expect, that the potential partnership profits are subject to capital gains tax rather than income tax. There is however, some risk that the tax authorities may view the profit as subject to income tax rather (not CGT), which for most investors would result in more tax being paid.
For institutions and offshore investors, we believe that the tax benefits of the SLP are likely to be positive.
AxiaFunder does not provide tax advice. Investors should seek their own tax advice.
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So, for a UK resident taxpayer, if CGT tax treatment applies, there is likely to be a significant improvement in the after tax net return. At current CGT tax rates, the investment would incur total tax of 20% ( the CGT tax rate in September 2021), rather than 40% on a full look-through basis. This has the potential to boost investors’ after tax profit by around a third (all else equal).
To illustrate: under the previous approach, where a UK limited company SPV has been setup for each case and issues shares, if a case wins there is corporation tax payable (currently 19%, increasing to 25% from 2023) after which investors are then required to pay CGT. On a full look-through basis therefore for each £100 of profit before tax from a case, a UK tax investor could expect to receive £60 net of corporation and CGT tax (ignoring tax allowances), being £100*(1-25%)*(1-20%). By contrast, investing through a partnership would result in a full look through after tax profit of £80, being £100*(1-20%).
The above applies, provided that the tax authorities accept, as we expect, that the potential partnership profits are subject to capital gains tax rather than income tax. There is however, some risk that the tax authorities may view the profit as subject to income tax rather (not CGT), which for most investors would result in more tax being paid.
For institutions and offshore investors, we believe that the tax benefits of the SLP are likely to be positive.
AxiaFunder does not provide tax advice. Investors should seek their own tax advice.
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