Use of LLPs as a Stepping Stone to Incorporation

10 December 2025

Use of LLPs as a Stepping Stone to Incorporation

Many landlords are asking about the use of LLPs (Limited Liability Partnerships) as a transition or stepping stone to incorporate as a limited company. The rationale behind this approach is the belief that transferring property into an LLP and later incorporating the LLP as a limited company can avoid CGT and SDLT on the transfers from the individual to the company. The following outlines the legislative framework to consider:

• The test case Elisabeth Moyne Ramsay v HMRC (2013) provides scope for incorporation relief. To qualify, landlords must demonstrate that their property letting activities amount to more than passive investment. The stronger the evidence across scale, time commitment, services provided, organisation, and commercial purpose, the more likely HMRC and the courts will accept the activity as a business. In the Ramsay case, the landlord worked 20 hours per week on the business, and this was accepted as substantial enough to qualify as a genuine business activity.
   
• Since the Ramsay case, HMRC’s stance has hardened. HMRC now explicitly warns against schemes involving LLPs used as a stepping stone to transfer property into a company to avoid CGT or SDLT. Such arrangements are likely to be challenged under anti-avoidance legislation, including the General Anti-Abuse Rule (GAAR) found in Part 5 FA 2013.
   
• The Government has introduced new legislation (Finance Act 2025 inserting s59AA(2) and (3) into TCGA 1992) specifically designed to counter these types of property transfers. Under this legislation, a landlord is treated as making the disposal at the time the asset was transferred into the LLP—not when the LLP is dissolved and the asset is transferred to a limited company. This means that transferring assets out of the LLP into a company triggers a chargeable event, with CGT calculated using the asset’s base cost and its market value at the time it was first transferred to the LLP.

Summary

• CGT: Incorporation relief requires a genuine business rather than passive investment. The Ramsay case supports this where activity is substantial (e.g., 20 hours per week). In such cases, incorporation relief is more likely to be accepted.
   
• SDLT: Reliefs may apply in genuine partnership incorporations, but contrived LLP structures designed primarily to avoid SDLT fall directly within HMRC’s avoidance focus. This route is not recommended under current legislation.