United Kingdom

Business entities

The principal forms of doing business in the United Kingdom are as follows:

Unincorporated businesses

'Sole traders' are self-employed individuals who are carrying on a trade. Whether a person is trading in comparison to making investments is not set out in the legislation and is the subject of considerable case law in the United Kingdom. There are 'badges of trade' that provide guidance to determine whether they should be taxed as running a trading business or simply making investments. As noted in the section on income tax, a sole trader is charged to income tax on their chargeable trading income along with their other sources of income.

Partnerships

As a matter of UK partnership law, a partnership exists if more than one person is carrying on a business with a view to making a profit. There is no separate tax definition of partnership. For tax purposes, a general or limited partnership formed under UK law is transparent and not an entity that is separate and distinct from the partners. A partnership’s taxable profits are computed and then allocated to the individual partners in accordance with the profit-sharing ratio. Scottish partnerships have different legal characteristics from those formed in other parts of the UK, but the tax treatment is the same. 

A limited liability partnership (LLP) is subject to different legal provisions from other kinds of partnership. The LLP itself is a separate legal entity, and the partner's exposure to losses is limited. UK LLPs are treated as partnerships for UK tax purposes so long as they carry on a trade or business. 

When considering an individual's status as a partner in an overseas partnership or LLP, the UK authorities will not be bound by how the entity is classified in its country of origin. Case law has determined a number of matters that should be considered when establishing whether a non-UK entity should be taxed in the United Kingdom as if it were a company or a partnership (which means that a UK-resident partner of a foreign partnership could be treated as if they had an ownership interest in a corporate entity). HMRC also maintains a public list of non-UK entities and the decisions it has previously made regarding their classification. However, if the parties have flexibility regarding the constitution of such entities, then their classification may be viewed differently, either by HMRC or the courts. This area is complex; consequently, specialist advice should be sought.

There are a number of different types of partner. Common examples are (i) full partner: also referred to as an 'equity partner' where the individual shares fully in the profits and losses of the partnership and takes an active role in running the partnership; (ii) salaried partner: a person who is held out to be a partner but is actually on a fixed salary rather than having the advantage/risk of a share in all the profits and losses; (iii) sleeping partner: a partner who takes no active role in the partnership but shares in the profits/losses; and (iv) member in an LLP. 

A partner is generally treated as self-employed for UK tax purposes. However, in the case of UK LLP's, the business must apply a series of tests (at least once per year) to its partners to ensure that they are self-employed, rather than employed. In essence, this tests whether an individual has risk and can be rewarded from being a partner in a business.

A mixed member partnership is one that has individuals and companies as members. Anti-avoidance rules can, in certain circumstances, reallocate (for UK tax purposes) profits from a corporate partner to an individual where the individual could confer some benefit from the corporate partner's profit share. Similarly, these provisions can reallocate an individual's share of losses to a corporate partner.

Basis period reform

The UK Government has brought in significant changes to the way self-employed individuals are taxed on trading profits. The changes are called “Basis Period Reform”. The new measures do not impact the UK taxation of non-trading income or capital gains.

Basis Periods: the old rules

The old rules were introduced in the tax year ending April 5, 1996. For continuing partners, they were taxed on their share of the taxable profits for the 12-month accounting period ending in the tax year. There were special rules for new partners. For the first tax year of joining a partnership, they were taxable on their share of the profits from the date of joining to the following April 5. Following the above example, a partner joining on January 1, 2021, will be taxed on their share of taxable profits from 1 January to April 5, 2021, in 2020/21. The first tax payment would be due on January 31, 2022. In year 2 (2021/22), they would be taxed on their taxable profits for the 12 months to December 31, 2021, with the balancing payment (after the payments on account paid in January and July 2022) due on January 31, 2023. Part of the partner’s profits from January 1, 2021, to April 5, 2021, have therefore been taxed twice. These are overlap profits. They will be deductible from the partner’s taxable profits in three situations: the tax year they leave the partnership; if the partnership moves the accounting date closer to April 5 or the partner either comes to or leaves the UK.

Basis Period Reform: the rules from 2024/25

From 2024/25, all partners will be assessed on their taxable profits for the tax year, rather than for the 12-month accounting period. The UK partner in a partnership with a December 31 year end will be taxed on the following in 2024/25:

1. 9 months of taxable profits from year-ended December 31, 2024 (April 6, 2024 – December 31, 2024)
2. 3 months of taxable profits from year-ended December 31, 2025 (January 1, 2025 – April 5, 2025).

A non-UK partner will be assessed on the same basis, but only to profits arising from the UK.

The calculation of the assessable taxable profits is a time-apportionment of the full 12-month accounting period. It is not possible to take the partner’s share of the profits for the 3 months to April 5, 2025.

For partnerships with year ends between March 31 and April 4, it is possible to treat them as if the year end is coterminous with the tax year to prevent partners needing to estimate profit shares for 1-5 days under the new rules.

Transition to the new rules: 2023/24 tax year

A partner’s taxable profits for the 2023/24 tax year will consist of two parts:

1. The standard part (12 months to December 31, 2023); plus
2. The transition part (3 months to April 5, 2024, less overlap profits).

Companies

A company is a separate legal entity from the people who control it or work for it. A business run by an individual or partners (above) can be incorporated into a company at any time, and a completely different tax regime will apply (see the Corporate tax summary for more information).

Treatment of trusts

Trusts under English law have evolved over several centuries. They can be divided into 'express' trusts, which are expressly created by deed or will, and 'implied' trusts, which are imposed by law or equity. Express trusts are used by individuals for a wide range of purposes, including the control of the use and destination of property, provision for those incapable of holding property for themselves, provision of benefits to employees, and charitable and educational trusts. The tax treatment of trusts has undergone significant changes over time, and there remain few tax reasons for transferring property into non-UK resident trusts for UK resident and domiciled individuals. Non-UK resident trusts are, however, frequently used by non-UK domiciled individuals. UK resident trusts continue to be used by UK domiciled/resident individuals as a means to provide for children/grandchildren whilst retaining an element of control over the assets.

UK legislation currently provides a specific regime for non-UK domiciled individuals setting up non-UK trusts with their overseas assets in that tax is broadly only due when payments/benefits are received from the trust. Capital payments, including benefits from non-UK resident trusts, are broadly matched to trust income and gains if the beneficiary is a UK tax resident. The rules in connection with non-UK domiciled individuals and trusts were changed from 6 April 2017. The rules are very complex and specialist advice should be sought in this area.

Trust register - 5th Anti-Money Laundering Directive (5MLD)

The 4th anti-money laundering directive (4MLD) was enacted into UK law by the Money Laundering Terrorist Financing and Transfer of Funds Regulations 2017. This introduced requirements:

• for trustees to maintain accurate and up-to-date records, in writing, of all of the beneficial owners (and potential beneficial owners) of a trust, and
• for HMRC to maintain a register of beneficial owners (and potential beneficial owners) of taxable relevant trusts

To comply with the second requirement HMRC launched The Trust Registration Service (“TRS”).

Further regulations were introduced on 6 October 2020 to implement the 5MLD. These regulations widened the scope of the TRS and extended access to the information provided beyond law enforcement agencies. Subsequently, in January 2023, HMRC changed their published practice and no longer exclude UK trusts which are collective investment schemes.

Which trusts are included in the TRS?

The 5MLD removed the previous link between the TRS and taxation. All express trusts are required to register under the TRS unless they are specifically defined as ‘out of scope’. In addition to UK resident trusts, HMRC envisages that any trust deemed to be administered in the United Kingdom are required to register. Their view is that a trust is ‘deemed to be administered in the United Kingdom’ if:

• they have one UK trustee, or
• where a trust is not required to register in another EU member state and enters into a business relationship with an ‘obliged entity’ in the United Kingdom or acquires real estate in the United Kingdom.

There is a wide definition of ‘obliged entity’ for these purposes. It includes banks, accountants, and law firms.

What information is required?

The 5MLD provides a distinction between the information required for trusts with an obligation under 5MLD and ‘taxable trusts’ (which would have been required to register under 4MLD). All trustees required to register under the TRS must provide the following for the relevant trust:

• Its name.
• The date it was settled.
• Its tax residence.
• The place it is administered and a contact address.
• The value of assets at the time of registration.

Trustees required to register that are not ‘taxable trusts’ must provide the following information to HMRC in respect of individuals who are defined as ‘beneficial owners’. The definition of beneficial owner includes settlors, trustees, and beneficiaries in certain circumstances (i.e. the recipient of a distribution from a discretionary trust and, for an interest in possession trust, the income beneficiary):

• Their full name.
• Month and year of birth.
• Country of residence.
• Nationality.
• Nature and extent of the individual’s beneficial interest (to include a note of whether the individual is a settlor, trustee, or beneficiary).

Taxable trusts will also be required to provide the following in respect of individual ‘beneficial owners’:

• Their full name.
• Date of birth.
• National insurance number or UTR, or, if the individual’s usual residential address is not in the United Kingdom, the individual’s passport number or identification card number.
• Nature of the individual’s relationship to the trust.

Filing deadlines

Trusts in existence at 6 October 2020 which met the registration criteria should have registered by 1 September 2022.

Most new trusts must register within 90 days of creation. 

In some instances registration is only required when the trust realises a tax liability. The deadline in this situation is 5 October following the tax year of liability for Income Tax and Capital Gains Tax and 31 January following the tax year of liability for all other relevant UK tax liabilities.

Trustees of ‘taxable trusts’ are required to make an annual declaration that the trust record is up to date. This is due by 31 January following the tax year in which a relevant UK tax liability has arisen.

Most trustees are also required to report changes to certain beneficial owner information within 90 days of the change.