A Scottish limited partnership (SLP) is a unique vehicle. Although it has been around for over a century, the SLP has been used in recent times for modern business purposes such as private equity and property investment fund structures. This article looks at the advantages of the SLP which make it so attractive to fund managers, promoters and investors, both domestic and overseas.
What is a limited partnership?
Like a general partnership, a limited partnership must consist of two or more partners who carry on business with a view to profit.
However, unlike a general partnership, in which all partners are jointly and severally liable for all the partnership debts, a limited partnership has two types of partner: general partners who are liable for the debts and obligations of the limited partnership and limited partners whose liability is limited to the extent of their capital contributions.
A limited partnership must have at least one general partner and one limited partner. In order to benefit from limited liability, a limited partner cannot take part in or interfere in management of the limited partnership. Management functions are exclusively allocated to the general partner.
Advantages of the SLP
The particular advantages of using the SLP are a combination of the following:
Separate legal personality: this is a unique trait of the SLP which is not enjoyed by limited partnerships constituted elsewhere in the UK. It means that the SLP itself can own assets, enter into contracts, sue or be sued, own property, borrow money and grant certain types of security.
Tax transparency: this means that the SLP is taxed as though it did not have a separate legal personality. No tax is payable by the SLP itself. Instead, the UK tax authorities (and other foreign tax jurisdictions) look through the partnership structure and partners are taxed on their share of partnership income and gains arrived at in accordance with their profit-sharing ratios (which can be different from the ratios in which capital has been contributed). The hybrid status of separate legal personality coupled with tax transparency offers the best of both worlds in a way that limited partnerships incorporated in other jurisdictions cannot.
Limited management participation: the legal requirement that limited partners may not participate in management makes SLPs ideal vehicles for multi-party investor structures where management and control rests with the general partner or manager appointed by the general partner.
Uses of an SLP
Investment fund structures
SLPs can be used flexibly in investment fund structures, as primary fund vehicles and as carried interest or feeder funds.
SLP as main fund vehicle
The SLP can be a main funds vehicle because: it can hold assets in its own name; there can be multiple but passive investors (the limited partners); only one person manages the investments and business of the partnership (the general partner); tax transparency means that each partner is taxed on the profits it receives, the amount of which will be determined by the limited partnership agreement.
SLP as a participant
Because it has separate legal personality, the SLP can also be used in funds or other structures which require ‘persons’ to be members. A common example of this is the use of the SLP as a carried interest partner. A ‘carried interest partner’ facilitates the performance based participation in the profits of the main fund by the fund manager.
The team at Brodies is a market leader in Scotland for devising and implementing asset backed SLP structures to assist with pension scheme deficit funding for clients including FTSE 100 companies and pension scheme trustees.
We have advised on highly structured transactions of this type with an aggregate value of over £2 billion. These structures are used to create a financial instrument backed by the cash flows from assets such as real estate, intellectual property or loan receivables.
Because it has separate legal personality and tax transparency, it is worth considering using the SLP in the context of tax structuring.
Setting up SLPs
Although not a legal requirement, there should always be a limited partnership agreement amongst the general and limited partners. This will cover, for example, the nature and amount of contributions by the limited partners, the allocation of profits, the administration of the SLP, and dissolution arrangements.
The agreement should be governed by Scots law and be executed in Scotland. SLPs have to be registered with the Registrar of Limited Partnerships at Companies House in Edinburgh. The formalities of registration can be effected within a short period.
Amongst other things, the SLP must have principal place of business in Scotland in order to become registered. However, it is possible to migrate this to another jurisdiction following registration and for the SLP’s activities to be managed offshore.
Taxation of partners in an SLP
UK tax resident partners are subject to UK tax on their share of worldwide partnership profits. Those partners who are not UK resident, however, will only pay UK tax if the partnership is carrying on a trade in the UK, and only on their share of profits arising in the UK. Whether or not partnership activities amount to a trade can be a difficult question, and care must be taken to ensure that the SLP will not inadvertently act in such a way as to be deemed to be carrying on a trade in the UK.
Provided the partnership is not trading in the UK, however, no UK tax will be payable by non-UK resident partners.
Collective investment schemes
Depending on what the SLP has been set up to do, it may be regarded as a collective investment scheme under the UK Financial Services and Markets Act 2000. Under UK law, a collective investment scheme must be operated by a person or entity authorised by the UK Financial Conduct Authority. Whether or not the SLP is also a collective investment scheme is a complex area of law and early stage legal advice should be obtained.
Brodies has gained market leading expertise on the establishment and use of Scottish Limited Partnerships in a wide range of contexts over the last 30 years, including as special purpose vehicles, private equity funds, real estate investment funds and carried interest vehicles in global fund structures.
We have been involved in both complex restructuring and litigation involving existing Scottish Limited Partnerships, working with leading counsel.
© Brodies LLP - September 2014
This note is for information purposes only. It does not constitute legal advice and should not be relied upon as such.