Setting up an Alternative Investment Fund Manager in the UK: Choosing the right structure

Introduction

Setting up an Alternative Investment Fund Manager (AIFM) in the UK is an exciting venture with potential for success and growth. As an AIFM, your ability to raise capital and manage funds effectively will be critical to the success of your business. However, amidst these core considerations, it is essential not to overlook the importance of choosing the right legal structure. Opting for the appropriate structure can have significant implications for your tax liabilities and operational flexibility.

In this article, we will explore the various structural options available to UK-based AIFMs and the key factors to consider when making this crucial decision. Understanding the implications of your chosen structure will ensure that your AIFM is compliant with regulatory demands, optimized for tax efficiency, and well-positioned for sustainable growth.

Structural Options: Companies and Limited Liability Partnerships (LLPs)

Before establishing your AIFM, one of the first decisions you will face is selecting the preferred legal structure for your business. The most common options for AIFMs in the UK are either forming a firm or a Limited Liability Partnership (LLP). While tax considerations are often the primary driver behind this decision, there are other important aspects to consider as well.

Taxation of Profits

A company is subject to Corporation Tax on its profits, with the current rate at 19%, set to rise to 25% in April 2023 on profits over £250,000. After paying Corporation Tax, the firm can choose to retain profits in the commerce or distribute them to shareholders as bonuses, which are subject to Income Tax. The top rate of Income Tax on dividends is currently 39.35%, resulting in a combined corporation and tax rate of around 51% for additional rate taxpayers (individuals with income over £150,000), expected to rise to around 55% after the Corporation Tax rate increase.

On the other hand, an LLP allocates its profits among its partners, and each partner is individually responsible for paying Income Tax on their share of profits. For partners with income exceeding £150,000, the Income Tax rate is 45%, and National Insurance is at 3.25%, resulting in a combined tax rate of 48.25%.

While both LLPs and companies generally face similar tax rates on profits, the exact rates depend on personal circumstances and the commerce. It is important to keep abreast of potential changes to tax rates in the future.

Timing Differences and Flexibility

Foundations may benefit from timing differences, as tax on bonuses is payable only when distributed to shareholders. Retained profits can be used for business growth, with only Corporation Tax being paid at that stage. In contrast, an LLP must pay Income Tax on all partner profits, regardless of distribution.

LLPs offer more flexibility when sharing profits and admitting new partners. Profit distribution in an LLP can be decided at the discretion of the partnership, whereas in a firm, dividends must follow the proportion of shareholdings. Additionally, the process of admitting new partners in an LLP is relatively straightforward, involving an amendment to the internal partnership agreement and standard notifications to the Financial Conduct Authority and Companies House. On the other hand, admitting a new shareholder to a company requires issuing new shares or transferring existing ones, which can be a more convoluted process with potential tax implications if shares are not acquired at market value.

Structural Options LLPs with Corporate Members

Some AIFMs are set up with a mixed structure. An LLP is set up as the AIFM, but a company is also established, becoming a partner in the LLP. In the past, this structure allowed AIFMs to enjoy the flexibility of profit allocation within the LLP, while retaining profits meant for the business within the corporate member, subject only to Corporation Tax at 19%.

However, the profits of this structure are no longer as appealing since April 2014. Excess profits allocated by an LLP to its corporate member are now taxed on individual partners. Consequently, significant profits can no longer be sheltered within the corporate member of the LLP.

Conclusion

Choosing the right legal structure is a critical step in setting up an Alternative Investment Fund Manager in the UK. While tax considerations are important, it is equally vital to consider other factors like operational flexibility and regulatory conformity. Whether you opt for a company or an LLP, understanding the implications of your choice will enable you to build a strong foundation for your AIFM, ensuring it thrives in a competitive market environment.

Seeking professional advice and staying informed about changes in tax regulations will help you make informed decisions, setting your AIFM on the path to success. A well-chosen legal structure will provide the necessary framework for your AIFM to navigate the complexities of the monetary industry, attract investors, and achieve sustainable growth over the long term. By carefully assessing your business objectives, risk appetite, and tax strategies, you can confidently establish an AIFM that meets both your immediate needs and future aspirations.