Understanding English Limited Partnerships

English Limited Partnerships (ELPs),are a popular joint venture and ownership structure allowing investors to pool resources for investment into and development of real estate assets.  This briefing summarises the key features and advantages of ELPs and the process to establish them.

Introduction

ELPs are a vehicle often used as a holding structure for UK Real Estate transactions. They offer an effective way for stakeholders to divide their interests between active, management roles and passive, investment-only roles in the underlying venture of the ELP.

This arrangement offers a mix of flexibility and tax efficiency that appeals to many investors. In this article, we will explore what ELPs are, how they are set up, and why they may be chosen over other corporate structures like companies or trusts.

What is an ELP?

An ELP is a form of partnership between at least one general partner and at least one limited partner. An ELP does not have its own distinct legal personality (unlike (i) an English private limited company and (ii) a Scottish limited partnership), which means the ELP cannot enter into contracts or own property. Such actions are instead taken via the general partner, who is responsible for the day-to-day management of the ELP and who has unlimited liability in respect of such actions.

Unlike the general partner(s), the limited partner(s) are not involved in the management of the partnership. The limited partner’s role is passive, involving the contribution of capital to the partnership with such contributions acting as a limit on their liability for any of the obligations of the partnership.

A detailed analysis of the tax regime applicable to LPs is outside of the scope of this article, however ELPs are typically ‘tax transparent’ for UK direct tax purposes, meaning applicable taxes are dealt with at the level of the general and limited partners. This avoids ‘double taxation’ of relevant amounts at the partnership level and again at the partner level. Different investors can invest together and be taxed according to their individual status.

Stamp duty land tax may arise when an interest in real estate is held directly by the ELP and interests in the ELP are being transferred or where LP ownership proportions change as a result of a subscription for new LP interests.

An ELP used for investment purposes will (unless an exemption applies) usually be treated as a collective investment scheme under Financial Services and Markets Act 2000 (as amended) (FSMA). This means it will need to appoint an operator authorised by the FCA prior to undertaking any regulated activity.

Since 2017, a new category of ELP’s exist, namely the Private Fund Limited Partnership. It is possible for an ELP to register with such status. Being designation as such allows the ELP to have different provisions apply when compared to a “normal” ELP e.g. there is no requirement for a partner to contribute capital; a non-exclusive whitelist of actions that limited partners can undertake without being deemed to participate in management (and therefore losing limited liability status) applies and fewer changes in status are required to be notified to the registrar.

Why use an ELP?

ELPs offer a range of benefits that set them apart from other corporate vehicles when holding UK real estate.

Reasons for use include:

• Limited liability – ELPs clearly distinguish between the roles of general and limited partners. Investors (as limited partners) benefit from limited liability: their risk is capped at the amount they invest, with no exposure of their personal assets to the partnership’s liabilities.

• “Passive investment” vs “Active management” roles – for stakeholders looking for a passive investment, the limited partnership role in an ELP can be an attractive choice. While the limited partner does not have control over the management of the business (a role reserved for the general partner), investing alongside a general partner with a well-established expertise in the Real Estate sector can offer them a balanced investment risk in the underlying venture. Conversely, for those with experience in the Real Estate sector seeking investor backing while retaining full control over day-to-day operations, the role of general partner in an ELP enables seasoned professionals to manage the day-to-day operations of the underlying venture and benefit from external capital, all without compromising their managerial autonomy.

• Flexibility – ELPs offer flexibility, as the partnership is not caught by the more stringent regulations governing English companies. It is instead governed by the Limited Partnerships Act 1907, which is less burdensome in comparison. The option of entering into a partnership agreement also gives partners the agency and flexibility to decide how to operate the ELP. This agreement can be tailored to address profit sharing, transfer of interests, and other operational matters, all to suit the needs of the parties involved.
• Tax transparency – as noted above, while a detailed analysis is outside of the scope of this article, ELP partners can also benefit from tax transparency, avoiding double taxation.

How is an ELP established?

Establishment of an ELP is a relatively quick process, but not quite as a quick as for an English private company. An ELP is formed by submitting a registration application to the registrar of companies (Companies House).  Registration is a requirement under the Limited Partnerships Act 1907, the legislation governing ELPs.

At least one general partner and one limited partner need to be appointed as part of the registration process. Further partners can be added later, subject to the consent of all the general partners or, if one exists, the terms of any partnership agreement governing the ELP.

The term of the ELP (if any) should also be stated in the registration application; the partners may agree a specific term that the partnership will remain in existence for or agree certain circumstances that will trigger its dissolution in a partnership agreement. Any such partnership agreement does not need to be provided to Companies House as part of the registration application.

The ELP comes into existence on the date of registration of the ELP, as evidenced by a certificate which is issued by Companies House.

Usually, in real estate joint venture structures, a short form partnership agreement is entered into at establishment of the ELP, effectively captive within one partner, with the long form partnership deed containing key commercial terms such as funding; governance; exit and restrictive covenants being entered upon the asset being brought into the relevant structure.

Conclusion and our experience

ELPs offer a compelling blend of flexibility, strategic roles and tax transparency, making them a popular choice for structuring real estate investments in the UK.

Burges Salmon’s Corporate Real Estate team have in-depth experience in acting for joint-ventures involving limited partnership structures.

With a team of Built Environment lawyers qualified across England, Wales, Scotland and Northern Ireland, we support clients on real estate matters across jurisdictions and project types. Our Corporate Real Estate team works closely with colleagues in construction, planning, tax, litigation, environmental and finance to provide integrated support throughout the lifecycle of real estate assets.

We have experience across many sectors including logistics, hospitality, office, residential (including build-to-rent and student accommodation), and large-scale regeneration schemes.

If you would like to explore any of the topics discussed above, please contact Jonathan Cantor (Partner, Corporate and M&A) and Ceren Ghanem (Solicitor, Corporate and M&A).