Leave LLP hedge fund LLP
- John Deane
- Updated: Mon, 19th Dec 2016
Our client was leaving a hedge fund LLP, of which he was a member. He was also a shareholder in a private company that was a corporate member of the LLP. The hedge fund also operated an off-shore trust vehicle. We advised on his income and capital gains tax, and negotiated his settlement and severance agreement.
How we negotiated an exit for the LLP member
We were instructed, and:
- Advised on the earn-outs payable to the member upon exit, and the associated tax position.
- Negotiated the non-compete restrictive covenants to our client’s favour.
- Ensured that our client was entitled to entrepreneurs’ relief on the capital elements of the exit package.
The hedge fund LLP tax structure
Our client was a member of a very successful hedge fund LLP. All the LLP members agreed our client should receive a substantial payment for giving up his share. The LLP operated in conjunction with an off shore corporate member of which our client was a director and shareholder.
Our client planned to resign and transfer his shares in the corporate member. Part of our client’s payment depended upon future income generated by our client’s trades.
How HMRC tax earn outs
We first explained how HMRC tax earn-outs, where the total consideration payable cannot be quantified when the deal is struck. We worked with accountants to value the earn out.
Our client would lose entrepreneurs’ relief on capital gains when some elements of the earn-out become payable, as he would not then be a partner. So, our client could pay capital gains tax on the right to the earn-out at the time of disposal, i.e. now, or pay more tax when the earn-out could be exactly quantified, i.e. when he was paid.
We then found ways to pay, tax free, the compensation for resigning his directorship. Some parts qualified for tax exemption. We ensured these payments formed part of the settlement agreement, which allow certain payments to be tax free in the hands of the recipient, subject to a limit.
The severance agreement was complicated. We negotiated the non-compete and non-poaching of clients. The hedge fund possessed valuable IP in its trading methods. So the fund wished to prevent our client using this IP in any new venture. Hence the LLP’s partners wanted indemnities and warranties from our client concerning his conduct prior to his departure from the LLP, i.e. that he had not disclosed any trading methods operated by the LLP.
We gave our client the best chance of being paid and closed down the “wiggle room” to avoid non-payment. We closely reviewed the payment terms and ensured advance payments against the earn-out were paid into a joint client account, operating as an escrow. Hence, our client’s payments were ear marked.
Our severance agreement from the LLP clearly defined which elements were taxable as income, and which qualified for capital treatment. Capital gains tax was payable at a much lower rate than income tax. We also ensured our client utilised the 10% entrepreneurs’ relief tax exemption. We obtained advance clearance from HMRC on the total deal which provided clarity on the tax treatment. That clarity then carried the deal through to signing.
Leaving an LLP is unlike leaving any other business. The departing member will be giving up rights to capital and future income, the latter often generated through the departing member’s own efforts. John Deane heads the LLP team at Gannons, and advises across a range of professional service sectors, including accountants, funds, solicitors, and architects.
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