Back to Basics | UK limited partnerships

Published in October 2022

Summary and implications

Limited partnerships in the UK (“LPs”) are an efficient structure for investment activity and we frequently see them used in structuring funds, clubs, joint ventures and other investment structures, as well as a means for structuring investment managers’ carried interest and co-investment arrangements. The LP’s core appeal lies mainly in its legal flexibility, tax transparency and the limited liability protection afforded to its investors.

What is a limited partnership?

An LP is a type of partnership with special characteristics that meets the requirements of the Limited Partnerships Act 1907 (the “1907 Act”). An LP must consist of two or more partners, who may be individuals, corporates or other entities with legal personality. At least one partner must be a general partner (there can be more than one general partner), with the remaining partners being limited partners. A person cannot be a limited partner and act as general partner at the same time.

An LP may take the form of an English limited partnership or a Scottish limited partnership. The fundamental difference between the two is that an English LP does not have its own separate legal personality whereas a Scottish LP does (see “Scottish limited partnerships” below).

A limited partnership (whether English or Scottish) can also be registered as a private fund limited partnership (“PFLP”). A PFLP is sub-category of limited partnership that was introduced following a 2017 reform of the 1907 Act. For further information on PFLPs, please see our separate briefing (UK Private fund limited partnership | CMS Funds Group).

A limited partnership will typically be governed by the terms of a written limited partnership agreement. If no limited partnership agreement is entered into, the default statutory framework will apply. However, one of the conditions for registration of a PFLP is that the PFLP must be constituted by a written agreement.

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. Where the LP constitutes an alternative investment fund or collective investment scheme for regulatory purposes, the general partner (unless suitably authorised itself) will be required to appoint a separate manager or operator (as applicable) to manage / operate the LP and/or its investments (see “Regulatory Issues” below).

Given the general partner has unlimited liability for the debts and obligations of the LP, the general partner is typically established as a special purpose vehicle, such as a limited company or limited liability partnership, in order to ringfence liability.

As an English LP does not have separate legal personality, it enters into contractual commitments acting through its general partner. While Scottish LPs do have their own legal personality, invariably they will also contract acting through their general partner.

Limited partners

The 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 LP and must not participate in the day-to-day management of the LP’s business. A limited partner which takes part in management of the LP will lose its limited liability status and become liable as if it were a general partner for as long as its participation in such management continues.

How are limited partnerships funded?

LPs are funded by capital contributions and/or loan advances from partners, and, at times, by borrowings from third parties.

For LPs which are not PFLPs, each limited partner must make a contribution of capital which must be registered with the UK Registrar of Companies. Any such limited partner’s capital contribution cannot be returned until the limited partner ceases to be a partner or the LP is dissolved.

The limited partners of a PFLP, on the other hand, may but are not required to contribute capital, meaning a participant in a PFLP can fund its commitment solely by way of loan advance (or can make no contributions at all). Any capital contributed by a limited partner to a PFLP is not required to be registered with the UK Registrar of Companies and the capital can be withdrawn at any time during the life of the PFLP. There is an exception in the case of an LP which was registered prior to 6 April 2017 and was subsequently redesignated as a PFLP. In this scenario, a PFLP does remain subject to the prohibition on withdrawal, to the extent of any capital contributed prior to its re-designation.

Amounts contributed by limited partners as loan advances to an LP (i.e. monies loaned) are not subject to the above requirements but are instead treated in accordance with the relevant terms of the advance. This is one reason why a limited partner’s commitment to the LP is often structured as a nominal capital contribution (often 0.01 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 and held by the general partner acting on behalf of the LP. Typically, the assets will be held by the general partner and/or nominee or subsidiary special purpose vehicle companies.

Legal framework

LPs are governed by a combination of the 1907 Act, the Partnership Act 1890 and rules of law and equity, together (where applicable) with the written limited partnership agreement of the LP. The 1907 Act was reformed in April 2017 to introduce the PFLP regime, primarily in an effort to align the UK limited partnerships framework with similar regimes in place in other core investment jurisdictions (such as Luxembourg and Delaware).

Registration of an LP is straightforward, quick and inexpensive and requires the delivery of a statement of particulars (a Form LP5 or, in respect of a PFLP, a Form LP7) to the UK Registrar of Companies (Companies House). Registration of a Scottish LP requires the delivery of a different statement of particulars (a LP5(s) or LP7(s)). On receipt of a valid registration application, Companies House will issue a certificate of registration at which time the LP has come into existence.

An ordinary LP can be re-designated as a PFLP through delivery to Companies House of a Form LP8. Certain changes to an LP must be notified to Companies House from time to time by submitting a Form LP6.

Scottish limited partnerships

Scottish LPs differ from English LPs in that a Scottish LP has separate legal personality. By virtue of its separate legal personality, a Scottish LP has the ability to own property, to enter into contracts and to be a member of another partnership. They are subject to a modified PSC regime and subject to the Bankruptcy (Scotland) Act 2016, instead of the Insolvency Act 1986.

Tax issues

For UK direct tax purposes, an LP provides the benefit of tax transparency. It 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 real estate directly; the transfer of an interest in an LP that holds UK real estate may trigger a five per cent charge on the gross underlying asset value of the interest acquired or transferred (on the gross asset value over £250,000, with lower rates applied to the portion of gross asset value below that). A transfer for these purposes may include the subscription by a new partner for an interest in the LP if certain conditions are met. LPs will therefore often hold real estate through intervening holding structures (such as companies (both onshore and offshore) and unit trusts) in order to mitigate those risks.

Where a VAT registration is required, it is typically the general partner that registers for VAT.

Regulatory issues

An LP used for investment purposes will normally be treated as a collective investment scheme (“CIS”) under the Financial Services and Markets Act 2000 (as amended) (“FSMA”) unless it is able to take advantage of an available exemption. Where an LP is classified as a CIS, it will (unless within scope of AIFMD as described below) need to appoint an FCA-authorised operator, which may add to the cost of using this vehicle. No regulated activity (including its establishment, operation and winding up) may be undertaken in respect of an LP which is a CIS unless undertaken by the authorised operator.

An LP may also fall within the scope of the EU’s Alternative Investment Fund Managers Directive (“AIFMD”) and/or the equivalent UK regime, The Alternative Investment Fund Managers Regulations 2013 (“UK AIFM Regulations”), in each case regulating the management of alternative investment funds (“AIFs”). Where an LP qualifies as an AIF, an appropriately authorised manager must be appointed (and there will be no need to appoint a separate CIS operator) and such manager will be responsible for ensuring compliance with AIFMD. Certain structures, such as employee incentive schemes, co-investment vehicles and joint ventures, may fall outside the remit of AIFMD and the UK AIFM Regulations. Specialist advice should generally be sought in relation to the AIFMD.

Partnership (Accounts) Regulations

The 1907 Act does not expressly require LPs to prepare accounts and the form and content of LP’s financial statements is usually set out in the limited partnership agreement of the LP. An LP is also not required to audit or publicly file its accounts unless it constitutes a Qualifying Partnership (“QP”) for the purposes of the Partnership (Accounts) Regulations 2008 (as amended by the Companies and Partnerships (Accounts and Audit) Regulations 2013) (the “2008 Regulations”).

An LP is a QP if each of its general partners is a limited company, an unlimited company each of whose members is a limited company, a Scottish partnership that it not a limited partnership or a Scottish partnership that is a limited partnership, each of whose general partners is a limited company.

A QP is required to prepare and audit its accounts in accordance with the usual Companies Act 2006 requirements as if the QP were a company (subject to certain modifications as set out in the 2008 Regulations). The general partner of a QP is also required to append a copy of the QP’s accounts to its accounts prepared for that year when filing with Companies House. However, the QP will be exempt from such requirements where its accounts are “dealt with on a consolidated basis” in the group accounts prepared by a parent undertaking and certain other conditions are satisfied.

It is possible to fall outside the ambit of the 2008 Regulations by using a limited liability partnership (LLP) as the general partner vehicle (either as a sole LLP general partner or by admitting an additional LLP general partner). It is worth noting that establishing and maintaining an LLP general partner structure may involve additional administration and governance as each LLP requires at least two members.

Proposed legislative reform of limited partnership law

In 2018, the UK’s Department for Business, Energy and Industrial Strategy (BEIS) published a consultation paper in relation to a proposed reform of limited partnership law in response to concerns that LPs (in particular Scottish LPs) were being misused. The outcome of the consultation included a range of proposed changes, including the imposing tighter LP registration requirements, requiring LPs to maintain a demonstrable link or connection to the UK, increasing reporting and transparency requirements and empowering the UK Registrar of Companies to strike from the register LPs which are dissolved or which the Registrar concludes are not in operation.

In September 2022, a new bill was introduced to UK Parliament, namely the Economic Crime and Corporate Transparency Bill (the “Bill”). The Bill seeks to implement the proposals set out in the BEIS proposed reform of limited partnership law consultation paper by, amongst other things, imposing more stringent requirements in relation to the registration of new limited partnerships and increasing ongoing disclosure and filing obligations (particularly with respect to ownership and control) in relation to existing limited partnerships. The Bill is however yet to be enacted into UK law.

Conclusion

LPs continue to be a popular vehicle choice for UK private funds and investment vehicles. In particular, the addition of the PFLP has seen wide take up in the industry and brings the UK LP toolkit in line with other popular funds jurisdictions such as Luxembourg and Delaware.

If you would like to discuss LP vehicles and their use in funds or other investment structures, please contact a member of the CMS UK Funds Group.