Aspects of Conversion to LLP by an Unlimited Name

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Aspects of Conversion to LLP by an Unlimited Name Powered By Docstoc
					                          Limited Liability Partnerships at Lloyd’s
                               New and Ongoing Membership
                      Conversion by an Unlimited Liability Name (Name)
                                   Tax planning and Wills


Why go LLP ?
         1. Limited liability?
         2. Inheritance Tax advantages if underwriting is continued, following death?

The Limited Liability Partnerships Act 2000 [the Act] with the Limited Liability Partnerships
Regulations 2001 introduced a new form of legal entity, combining the features and tax
transparency of a partnership with limited liability for the Members.

The Lloyd‟s market has produced an Invitation Document, “An Invitation to Participate in Limited
Liability Partnerships at Lloyd‟s”, which is issued by the members‟ agents. It contains advice and a
pro forma Members‟ Agreement which is well and most professionally designed for a Lloyd‟s LLP
and acceptable to Lloyd‟s. Amendments to the pro forma Members‟ Agreement are possible but
would be expensive in terms of Lloyd‟s extra charges for approval and of professional fees. Most
new LLP participants and Converting Names will no doubt rely solely on their members‟ agents‟
advice and adopt the pro forma Members‟ Agreement unamended. Further amendments might also
make the future sale of the LLP or of shares in it more difficult and expensive in legal costs.

The Invitation Document is required reading for the aspiring LLP Member.

This paper looks at some aspects which hopefully will assist Names to understand the operation of a
Lloyd‟s LLP and in reaching a decision on conversion to a LLP. The general principles of a LLP
trading at Lloyd‟s are, of course, broadly understood by Unlimited Liability Names.

This article also contains advice on Will drafting and tax planning for all LLP Members

1. Capital Requirements for Underwriting at Lloyd‟s.
      It is important to appreciate these requirements before considering Interavailability, as they
      are a factor in assessing the protection afforded to Lloyd‟s Members today. Every half year
      Lloyd‟s takes stock of the risks applying to each Member‟s underwriting and the sufficiency
      of the Deposit of Funds at Lloyd‟s (FAL) to meet capital requirements in respect of his
      underwriting. For each trading Year of Account the Member must have put up by the
      Coming-into-Line Date (CILDate) (30th November in 2011) sufficient FAL to satisfy FSA
      and Lloyd‟s requirements.

       In addition to certain minima for each Lloyd‟s Member, corporate or otherwise, there is a
       capital requirement of the greater of:
                i. 40% of the overall premium limit (OPL) (less for EU motor insurance); or
               ii. the Member‟s risk assessed capital requirement; and
              iii. the Member‟s capital resources requirement.

       These capital requirements involve the application of tests as follows:
          a) A Lloyd‟s Member must have a solvency margin, the Minimum Capital
              Requirement. This is the higher of a percentage of premiums and claims – broadly
              16% of premiums during the previous financial year – or 23% of average claims
              incurred in the three previous financial years. For certain classes of business the
              premiums and claims are increased by 50% for the purpose of the calculations
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           b) A specific individual capital assessment (ICA) for each syndicate which is calculated
              by the managing agents in accordance with the FSA‟s requirements, and which
              enables Lloyd‟s to determine the level of the Lloyd‟s‟ Economic Capital Assessment
              (ECA) for each Member. Lloyd‟s raises the ICA by a percentage uplift to a figure
              which Lloyd‟s considers prudent in determining the Member‟s own ECA.

       In deciding the way forward, the Name will bear in mind that the regulations for Members‟
       capital requirements as introduced in recent years by the FSA and Lloyd‟s, have greatly
       increased protection not only for the policyholders, but for all Members, so important in a
       market where each one has mutual liability with all other Members through the Central Fund
       to which they have to contribute.

2   Interavailability for Converting Names.
        To facilitate Conversion, the Name‟s Lloyd‟s Deposit is made Interavailable to provide
        security for the underwriting liabilities of the Successor LLP as well as for those of the
        Name‟s business prior to Conversion. The process involves a new deposit trust to which the
        Name‟s existing deposit is transferred by release, advance and resettlement by Deed – the
        Interavailability Deed.

       The Deposit is split under the Interavailability Deed into two separate funds:
           a) the unappropriated fund supporting the Name‟s past business; and
           b) a specified fund for the Successor LLP which will support both the Name‟s past
              business and the future underwriting business of the Successor LLP.
       If a payment is made out of the Deposit to meet liabilities of the Name‟s past business,
       Lloyd‟s may require the Name to make good the payment. The past business does not
       acquire limited liability protection.

       If the unappropriated fund is not enough to meet Lloyd‟s capital requirements, the
       Interavailable funds supporting the business of the Successor LLP may be reduced. In turn
       this may reduce the LLP‟s ability to underwrite because there will be fewer assets to support
       it.

       The Converting Name and LLP are separate entities for solvency purposes. A surplus in the
       unappropriated fund (other than Special Reserve Funds) may be made available to support
       the Successor LLP.

       Included in the Interavailability Deed is a cross-deficit clause whereby, should the
       Interavailable funds be exhausted, the profits of the LLP‟s first year of account can be used
       to meet the losses of the final year of account of the Name‟s unlimited underwriting.

3. No going back
       Once in a LLP there is no going back to unlimited liability status. Entry into Lloyd‟s is now
       only permitted by Lloyd‟s by way of a limited liability vehicle. Fiscal rules for corporates
       change all the time and not always for the better. It is the same with Lloyd‟s and FSA
       regulation. Lloyd‟s‟ capital requirements put the FAL required of LLPs at a similar level to
       that of Names. It is not unreasonable to assume that the level required of LLPs will in the
       future approach that of spread corporates. It seems only natural that this should happen in
       order to protect the Central Fund since LLPs do not have the backing of other personal
       wealth.


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       Section 10.14 on page 30, of the Invitation Document, contains the warning that as “LLPs
       are a new form of Corporate Member, ……..risks may arise in relation to participation in
       them which are unknown and/or unforeseen……..Any such risks may in particular attach to
       “group” LLPs, where there are more than one contributing Member, especially if there is a
       considerable degree of discrepancy in……..the sharing of profits, allocation of losses,
       introduction of Capacity or provision of FAL, whether at the outset or over time.”

4.     Special Reserve Fund (SRF), Personal Reserve Fund (PRF) and Capital Requirement
stringencies in the initial years of a LLP.
        The SRFfacility to put aside gross profits to meet future losses, is a valuable cash flow
        feature of unlimited liability underwriting. The SRF is also valuable as until this untaxed
        fund is drawn down to pay off losses, it is available towards meeting Lloyd‟s capital
        requirements for FAL.

       For the Converting Name the SRF is unavailable to meet Lloyd‟s capital requirements for
       Interavailablity, in respect of the funds required for the Successor LLP. The PRF is also
       ineligible for Interavailability.

       However the SRF continues to be available to support the Converting Name‟s underwriting
       prior to conversion, subject to the limitations on the use of the SRF in meeting capital
       requirements.

       An Unlimited Name with a planned 2010 capacity of £1,776,213 (inclusive of emptions)
       and FAL of £789,282 (inclusive of SRF of £230,114), just sufficient for her unlimited
       underwriting, intended to convert to a LLP. She was advised that the SRF would be
       disregarded for the purposes of the LLP and that she must put up additional FAL of
       £230,114 or reduce her capacity to £1,358,155 by sale at auction.

       It is understood that many Unlimited Names have been deterred from converting where they
       have been relying on their SRF to satisfy Lloyd‟s capital requirements.

       Only after all open and run-off years of the Converting Name‟s unlimited liability
       underwriting have been closed by reinsurance to close [RITC] and other liabilities for the
       release of FAL have been provided for, may the SRF be distributed and this may not fall in
       the most favourable tax year. Distributions will be taxable at the going rate – 50% in all
       probability! Some mitigation may be possible through obtaining exeat reinsurance policies
       issued by Centrewrite so as to advance the timing of closure and consequent tax charge.

       A new capital requirement problem arises at the end of the first year of the LLP. The FAL
       level furnished at the beginning of the first year is unlikely to be enough for the second year,
       even if the Premium Income Limit is unchanged. The FAL for the second year must not
       only cover that second year, but also the unclosed account of the first year. The unclosed
       year may well be indicating a future profit, but because Lloyd‟s disregards reinsurance
       recoveries which have not been actually received, the unclosed year is carried forward as a
       loss to be covered by additional FAL in the second year. The situation is repeated at the end
       of the second year but mitigated by the start of the receipt of recoveries in the first year of
       account. The same situation arises at the end of the third year but mitigated by the receipt of
       recoveries in the first and second years of account.

       The Member of the new LLP must be in a position to inject additional FAL in subsequent
       years until after the third year has closed. Converting Names should remember that the
       accruing profits on the unclosed years of their underwriting prior to conversion are of no
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       relevance to the capital requirements of the LLP which is a Member of Lloyd‟s in its own
       right and different from the Unlimited Name.

       Exceptionally a very profitable year such as 2006 can throw up a profit despite Lloyd‟s
       disregard of reinsurance recoveries not received.

       Remember always that accruing profits from the three unclosed years of the Converting
       Name‟s unlimited underwriting are disregarded by Lloyd‟s so far as concerns the LLP
       which is a Member of Lloyd‟s in its own right and different from the Unlimited Name.

5. FAL Release
     Except insofar as FAL is in surplus of Lloyd‟s capital requirements, FAL supporting the
     Converting Name‟s past business, the unappropriated fund, are also not released by Lloyd‟s
     until the last of all syndicates‟ open years have been closed by RITC and other liabilities
     provided for. However, as the Converting Name‟s past business is run down with the
     passage of time, some of the unappropriated fund may become surplus to Lloyd‟s capital
     requirements and releasable.

       The Member required or wishing to put more funds into his LLP to pay losses or purchase
       capacity may find himself constrained by the “freezing” of FAL retained by Lloyd‟s in
       support of the past business.

       FAL which is made Interavailable, unless in surplus, will not be released.

6. The Designated Members
      The LLP Act requires two Members on incorporation. Limited liability protection is lost if
      the number drops below two for more than six months. The Act also requires at least two
      members to be “designated” and they are made responsible for the administrative and filing
      duties and certain tasks arising under the Companies Act 1985 and the Insolvency Act 1986.

7. Initial and annual costs.
       Members‟ agents have created separate service companies to provide all management
       services and expenses necessary for the setting up and proper management and conduct of
       the LLP or they provide these services using their agency company. Two Designated
       Members, being limited liability companies, are provided for the LLP as required by the
       Act, with one vote each, [but without contribution of capital or profit-sharing rights] which
       ensures continuity of the limited liability of the LLP.

       The set-up fees for a successor LLPcharged by members‟ agents are up to £3,000 +. The
       annual fees vary between over £3,200 + VAT and £2,000 + VAT

       For a new participant at Lloyd‟s the set up fee for a LLP is around £10,000

       There seems to be no impediment preventing a Service Company created by one members‟
       agent, providing the services required by a LLP where the underwriting is conducted
       through another members‟ agent.

       Lloyd‟s charges on processing Membership of a Successor LLP £2,000+ VAT, £500 + VAT
       as a contribution towards the cost of promoting LLPs as a new category of Corporate
       Member and £150 (VAT free) for setting up the Interavailable arrangement. £155 is
       payable for the admission of an additional family Member to a LLP. For non-family
       Members different rules apply.
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       For a new participant at Lloyd‟s (single or family members), Lloyd‟s charges £5,000 + VAT
       for up to four LLP members, plus £155 for each additional member. For a new unconnected
       group, Lloyd‟s‟s set up fee is £25,000 + VAT.

       Companies House fees are £50.

       Set-up fees are not tax allowable, being pre-trading expenses.

       Lloyd‟s Market Services will continue to charge in respect of pre-conversion underwriting
       until all syndicate years of account have been closed as well as for the LLP‟s underwriting.

       Managing and members‟ agents fees will remain payable as before.

8. Death prior to commencement of Underwriting within a LLP
      While a LLP can be formed at any time, the Member must be alive on the 1st January of the
      LLP‟s first underwriting year. If death occurs beforehand, Lloyd‟s will require the LLP to
      be unwound. There is no question of personal representatives standing in his shoes as
      described in Section 13 below, which only deals with death occurring after the LLP has
      commenced underwriting.

9. Taxation
      The LLP is not a taxable entity. Profits and losses are allocated to the Members in
      accordance with the Members‟ Agreement and liability for taxes is in the hands of each
      Member. Nevertheless the fiscal transparency which is claimed for LLPs, is not total in the
      case of relief in respect of a Member‟s losses.

       If relief for losses made by a LLP is claimed against other income (“sideways loss relief”), it
       is restricted to the greater of (a) the amount of capital contributed by the Member to the
       LLP, less drawings to pay the losses and (b) the Member‟s liability on a winding up of the
       LLP. The HMRC rules regarding this relief are complex

       Losses which do not benefit from sideways loss relief are carried forward and set against the
       Member‟s future LLP profits.

       There are also tax rules relating to the cessation and commencement of business which
       apply to the cessation of the Converting Name‟s past business and the commencement of the
       business of the Member‟s interest in the LLP.

10. Continuation of insurance obligations despite closure of all underwriting years by RITC.
       Insurance obligations continue indefinitely, because of the possibility of a claim arising,
       should RITC fail. This is a reality for Membership of Lloyd‟s whether as a Member of a
       LLP or for a Name, and whether alive or dead. For a Name, family executors may not be
       overly concerned once all open years have been closed. For a LLP Member, it could be of
       great inconvenience, if not a worry, since a LLP must stay in existence to perform its
       obligations. It is not therefore possible to wind up a LLP and remove it from the Companies
       House register. The cost of the annual administrative and financial burden and completion
       of accounts under the Companies Act will continue indefinitely. Members‟ agents and
       others would no doubt provide the necessary compliance service for a one-off fee, but they
       are not guaranteed to remain in existence, unlike the insurance obligations.

       Lloyd‟s is understood to be in discussion with the authorities to mitigate this burden.
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11. Disposal of Membership of LLP – the Exit Route.
       One way of escaping the difficulty of being unable to wind up the LLP with finality, is for
       the sale of the Member‟s interest to the other active Member(s), if there are any in the LLP,
       or to a third party. Alternatively the LLP itself can be sold. Members‟ agents keep a list of
       LLPs available for sale.

       There may, however, be no market at any particular time. The Member‟s interest is in a
       LLP which is an unlisted investment and therefore illiquid.

       Sale will come probably at a cost. The price will be between what a willing seller and a
       willing buyer can agree. The value attributable to the capacity held on syndicates would be
       very much open to debate – desirability and balance of risks underwritten, time lapse since
       pricings at the last auctions, changing market conditions etc. The LLP is perhaps best
       marketed after capacity has been sold off through the auction process, but the LLP may not
       then be so attractive to a purchaser.

       There would also be the expense of professional advice.

       Certainly the Name‟s exit from the market is easier and less fraught, than the exit of the
       Member of a LLP.

12. The Commitment.
       The pro forma Members‟ Agreement defines the Commitment as “the commitment made by
       the Member to meet any underwriting losses of the LLP up to the maximum amount as
       specified in” Schedule 2 of the Agreement and amended from time to time. The
       Commitment is not the same thing as FAL or the capacity, despite it being easy to confuse
       the two.

       Lloyd‟s determines the annual Capital Requirement in relation to syndicate capacity held in
       the LLP and open years of account. To meet that Capital Requirement, the Member
       deposits FAL. At the start of underwriting through a LLP the Member makes the
       Commitment, equal to the FAL so required. For the commencement of each subsequent
       year the Capital Requirement is recalculated according to the capacity held, the FAL once
       again matched to it and the Commitment revised to the value of the FAL required, this being
       the maximum amount of the losses to which the Member is committed.

       At the start of the LLP‟s underwriting, the FAL put up by the Member will therefore be
       equal at least in value to his Commitment. If the value of the FAL falls, (except as a result
       of drawdown for the payment of losses), Lloyd‟s will require the provision of additional
       FAL. If assets cease to be acceptable to Lloyd‟s, Lloyd‟s will require them to be replaced.
       There are potential sanctions by Lloyd‟s.

       So while Lloyd‟s allows, in the case of a LLP, reduction in FAL through payment of losses
       to the point where there are no more FAL to support the Current Commitment, at which
       point a Member ceases to be under an obligation to advance further amounts to the LLP, a
       Member cannot plead protection of limited liability when requested by Lloyd‟s to make
       good shortfalls arising from a drop in the value of FAL or assets being unacceptable to
       Lloyd‟s.



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       To come back within Lloyd‟s capital requirements for FAL (other than by the provision of
       further funds), capacity may be reduced for the next year of account by surrender back to the
       managing agents, or by sale. Either way there is a disposal for CGTax purposes.

       Furthermore, experience has shown that where there is a shortfall in FAL, to correct this
       imbalance by reducing capacity can necessitate a substantial disposal of capacity as the FAL
       are supporting not only the current year of account‟s underwriting, but also prior unclosed
       years.

       Surplus FAL which are in excess of the current Commitment as a result of appreciation in
       the value of the FAL or reduction in the Commitment, are at risk of being taken by Lloyd‟s
       to meet calls, unless Lloyd‟s Capital Test for the LLP and its other Members allows the
       release of FAL which are surplus to the Current Commitment, and the surplus is withdrawn

       It will be seen from these comments that strains on cash flow and other personal wealth can
       arise for the Member with a shortfall of FAL. He will also have to meet CGTax on
       disposals of capacity and FAL. While this may be equally true for a Name, the procedures
       involved in obtaining a release of cash for an LLP Member may be greater, particularly if
       there are other Members in the LLP, for the reasons described below.

       In the past 20 years, in the case of Names with a diversified portfolio of capacity,
       resignation or bankruptcy tended to occur where there had been a number of years of
       attritional losses in a down-cycle, rather than a loss in a single year (as with the WTC or
       hurricanes which were contained), coupled with an insufficiency of other personal wealth
       outside Lloyd‟s to meet calls. Otherwise the experience of Names has been to realise or
       borrow on the security of other personal wealth outside of Lloyd‟s in order to make good the
       yearly losses, in the expectation of a rise in premiums, and consequently profits, stemming
       from the hardening of the market which generally follows severe losses. To inject
       replacement capital when underwriting as a Member in a LLP in order to make good yearly
       losses, instead of selling off capacity, rather negates the usefulness of limited liability, but it
       is thought that a Member of a LLP would do much the same as a Name and make up the
       shortfall in FAL, using assets outside Lloyd‟s. Members as well as Names are encouraged
       to do so for the following reasons:

          The improvement which has occurred in the disclosure of syndicate performance on a
           quarterly basis during the open years, which has facilitated planning and decision
           making for third party capital.

          Lloyd‟s and the FSA capital requirements for both syndicates and Members have
           strengthened the Lloyd‟s market.

          The Lloyd‟s Performance Management Directorate, formerly the Lloyd‟s Franchise
           Board, which sets the franchise strategy, and is responsible for risk management and
           profitability targets across the market, has greatly reduced the opportunity of “idiot”
           underwriting losses, even if the unimaginable mid-Atlantic tsunami may one day
           happen.

13. Termination and Transfer of underwriting on death of the LLP Member.
       The LLP Act provides that Membership ceases on death. The deceased Member‟s interest
       falls then to be wound up. This is not what many Converting Names anticipate. They want
       their beneficiaries, personal representatives or trustees, if they so wish, to become a

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    Member(s) and to succeed to the deceased Member‟s FAL and interest in the LLP‟s
    capacity.

    Clause 26.2 of the pro forma Members' Agreement meets this objective, after the Member
    has died, by providing that if a written application for the admission of the new Member is
    “received before the CIL Date (30th November for 2011) following the deceased Member's
    death or such later date as the LLP agrees and subject to Lloyd's prior written consent”, the
    application will be accepted

    But Lloyd‟s will still require the LLP, as a member of Lloyd‟s (as for any Name), to be „in
    line‟ as to its capital requirements by the CIL Date.

    Lloyd‟s also has a deadline of 30 September for the addition of a new member to an existing
    LLP, though it will waive this condition in what it judges to be exceptional circumstances.
    Lloyd‟s accepts that the death of a Member of a LLP creates an exceptional circumstance
    and that the personal representatives or beneficiary can be admitted as a Member of the LLP
    if application is made before the CIL Date. Even after that date, if the LLP was in line at the
    CIL Date, admission is permitted provided all other requirements have been satisfied, and
    whether the death occurred before or after the CIL Date.

    The closer the death to the end of the year, the less time there is to complete the formalities
    of the LLP and Lloyd‟s, and for obtaining the grant of Probate of the Will by the executor or
    Letters of Administration by the administrator as on intestacy

    Lloyd‟s is not insistent on a grant of Probate if there is a Will, but will wish to see the Will
    to verify the personal representatives, i.e. the executors, and, if appropriate, that they have
    the power to vest the business in the beneficiary. This relaxed approach may surprise, but it
    should be remembered that it is the LLP, as a corporate body, which is the underwriting
    member of Lloyd‟s, not the Member or his personal representatives. Sometimes the
    appointment of executors is conditional on survival of a short period, eg 30 days. This is to
    be avoided since Lloyd‟s would not recognise the executors until expiry of the short period.
    This comment applies equally where the beneficiary‟s entitlement is conditional on survival
    of a short period. Timing could be critical and this should be recognised in the drafting of
    the Will.

    The LLP would still require completion of application forms for the LLP and Lloyd‟s, a
    Resolution for the admission of the new Member(s), the Deed of Transfer and Adherence (in
    the form in the 3rd Schedule of the pro forma Members‟ Agreement) and of other
    documentation.

    If there is no Will, Lloyds is most unlikely to accept a new Member in respect of the
    deceased‟s share until the administrator has been confirmed by the issue of Letters of
    Administration.

    It is on the side of the executors where there can be greater difficulties, if Probate has yet to
    be granted. In dealing with a deceased‟s affairs before the grant has been made, they could
    be acting de son tort if a later Will turns up which appoints different named persons as
    executors. This means that the earlier named executors would be personally responsible for
    adverse consequences of their actions. Until the grant is obtained, the executors act in a
    climate of uncertainty.


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       If the executors are members of the family, they will probably wish to help by signing
       consent prior to Probate to their own or a beneficiary‟s admission as Member. This would
       be less likely in the case of solicitor or bank executors, though letters of indemnity from the
       beneficiaries might ease the way.

       A side letter addressed by the Member prior to death, to the executors authorising them,
       before grant of Probate, to accept membership of the LLP or to vest the deceased Member‟s
       interest in the beneficiary named in the Will, might reassure the executors but may still not
       satisfy them, particularly if there are no appropriate provisions in the Will. A side letter has
       no testamentary effect.

       The advice to an active LLP Member must be:
           to make a Will (a side letter setting out the Member‟s wishes might be helpful),
           appointing executors with immediate effect e.g. without a condition of survival of 30
              days or other period.
           containing power for the executors or trustees, to continue the underwriting business,
              or to vest it in the beneficiary or trustees whose entitlement should also be immediate
              without any condition which might defer entitlement,
           and permitting the exercise of the powers under the Will, without personal liability to
              themselves, notwithstanding that Probate may not have been granted.

       Sometimes there may be too little time to settle or agree who should carry on the
       underwriting interests or make other decisions pending grant of Probate. The danger of the
       LLP being forced into administration through lack of time can be mitigated as next
       described.

       Where it is known who will succeed to the interests of the Member on his death – his
       executors, or trustees, spouse, or other intended beneficiary – the admission of that person as
       a non-contributing Member of the LLP, (who is one who makes no Commitment and has no
       capacity share or any right to share in profits (or losses)) will facilitate and accelerate the
       later transmission of the deceased Member‟s interests in the LLP. The non-contributing
       Member will have already been recognised by Lloyd‟s and by the LLP. The admission
       procedure for a new Member will not arise as an urgency. Nevertheless the executors might
       still require to know that the LLP was to continue underwriting and in whose name. The
       Will containing the power provisions as advised above, coupled with the side letter, lessens
       problems.

14. Incapacity of a LLP Member
        Where an Order is made by any Court claiming jurisdiction, on the ground of the mental
        disorder of the LLP Member, for his detention or for the appointment of a guardian or
        receiver or other person to exercise powers with respect to his property or affairs, clause
        23.10 of the pro forma Member‟s Agreement provides that the Member shall be treated as
        having given notice of resignation and that his interests in the LLP be wound down.

       To minimise the possibility of the making of such an Order by a Court, the Member should
       ensure that an Enduring or Lasting Power of Attorney has been executed in favour of others
       young enough to manage his property and affairs for the remainder of his life. The Power
       would be accepted by Lloyd‟s as giving the necessary authority for the running of the LLP.

       Incapacity arising before the commencement of underwriting through an LLP, would
       probably lead to Lloyd‟s insisting on the LLP being unwound, unless a Power was in place.

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15. IHTax planning implications
       Unlimited underwriting is not transferable and ends on death, but with 100% IHT business
       property relief (BPR). Within a LLP underwriting continues, and can be gifted or
       bequeathed, again with BPR, outright to spouse or children, who will have the benefit of
       BPR when they in turn make gifts or die.

       A discretionary trust could be useful where the LLP is to continue through more than one
       generation, as it places the membership of the LLP in the hands of a few persons, the
       trustees, instead of an unwieldy number of discordant descendants, of children too young to
       inherit, or grasping spouses. The IHTax periodic charge applicable to discretionary trusts,
       currently 6%, on every tenth anniversary, will not be incurred as BPR will apply.

       Discretionary trusts give flexible powers for payment of income and capital to beneficiaries,
       e.g. for school fees or to accumulate income, and can be fiscally relocated abroad,
       terminated at will or continued virtually indefinitely. Payments of income to beneficiaries
       under the trust, such as grandchildren, do not attract IHT as would gifts of income by an
       individual. Transfers out of capital would have BPR.

       Clause 26.2 of the pro forma Members‟ Agreement makes provision for the personal
       representatives or, with their consent, any third party to be admitted in the place of the
       deceased Member. The trustees of the discretionary trust would be admitted as new
       Members to carry on the underwriting business, subject as always to Lloyd‟s approval.
       Clause 26.2 specifically provides that the deceased Member‟s share in the LLP shall be
       deemed to have been transferred to the new Members.

       It should be noted that Lloyd‟s would not allow a LLP Member to satisfy his FAL
       obligations by arranging for trustees to deposit with Lloyd‟s, trust funds which he did not
       own.

       The importance of a properly drafted Will with full powers necessary for the trustees of the
       discretionary trust to continue the deceased Member‟s business in the LLP cannot be too
       strongly stressed.

16. Group Membership LLPs
       Names have been interested by the possibility of bringing family Members into Membership
       of the proposed LLPs.

       Group LLPs give rise to consequences which should be considered when contemplating
       joining in other persons as Members.

             LLP‟s capacity. Capacity contributed to the LLP, is pooled. Consequently the sale
              or surrender of capacity by the LLP will be a disposal for Capital Gains Tax
              purposes by all the Members, not just the particular Member who provided that
              capacity.

             Ownership of FAL. Each Member retains ownership of the assets which he puts up
              as FAL.

             Introduction of new active Members. In the case of a Converting Name, FAL must
              be at least £100,000 per Member or £350,000 for the LLP, whichever is the lower.


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         For a new investor in a LLP the minimum FAL required is £350,000 or £100,000 per
         Member, whichever is the greater.

         A new Member will put up cash to acquire capacity, and his own FAL. If these are
         provided by the Converting Name, there will be CGTax and IHT implications.

        Profit Shares. It is for the Members to decide how these should be and to record the
         decision in the Members Agreement. The most logical and justifiable is for the
         profit shares to be in the same proportions as the proportions in which the capacity is
         contributed. If the sharing ratios were to reflect the extra work carried out by a
         decision taking Member or the greater contribution of FAL and higher Commitment
         of a Member, this should be quite acceptable to HMRC and Lloyd‟s. However
         HMRC issued in December 2007 a consultation document with the intention of
         ensuring that the person responsible for generating the income is the one to be taxed.
         Partnerships, including limited liability partnerships, were specifically targeted so
         that if the contribution of the partner or Member entitled to the profit was insufficient
         to justify receipt of the income, then the person responsible for generating it should
         be taxed. Legislation for these proposals has been postponed because of, it has been
         suggested, the current economic climate. It remains under review.

        Mutualisation. It is the LLP which trades at Lloyd‟s, not its Member(s).
         The FAL of all Members of the LLP are available to support the underwriting of the
         LLP and one Member‟s FAL may bear a disproportionate share of losses or cash
         calls. In effect the liabilities of the LLP‟s Members are mutualised where:
                 1) Lloyd‟s exercises its discretion in applying FAL to meet cash calls and
                 losses of the LLP in proportions different from those advised by the LLP as
                 reflecting the profit and loss sharing of the Members; or
                 2) another Member‟s Lloyd‟s deposit is reduced for any reason, including
                 that Member‟s own liabilities as a Name prior to Conversion; or
                 3) profits retained and funds provided by one Member and held in the LLP‟s
                 Personal Reserve Fund may be used by Lloyd‟s (unless otherwise instructed)
                 to meet cash calls and losses of the LLP; or
                 4) by reason of the operation of the cross-deficit clause in the Interavailablity
                 Deed, the profits of the LLP‟s first year of account are used by Lloyd‟s to
                 meet the losses of any Member who was a Converting Name arising in the
                 final year of account of that Member.

         Section10.11 of the Invitation Document describes other mutualisation risks.

         To minimise mutualisation risks for LLPs during Interavailability, Lloyd‟s restricts
         the withdrawal of surplus FAL which would be otherwise available, to 50%.

         The risks of mutualisation are recognised by Clause 9 of the pro forma Members‟
         Agreement which provides for indemnities by Members in favour of each other.

        Tax relief for unrelieved losses prior to Conversion. These can only be carried
         forward to be set off against the LLP Member‟s profits if the Member has a profit
         share in excess of 50%. Two Names, such as spouses, who are converting are best
         advised to create separate LLPs. They cannot both have a profit share in excess of
         50%. They cannot foretell with certainty that the final year of their unlimited trading
         will be profitable when the last date for submission to Lloyd‟s of the corporate
         Membership application in respect of a LLP is in September of that final year.
11
              On the other hand relief will not be put at risk by the introduction of family
              Members with a minority share who have no prior Conversion underwriting
              business, so long as the Converting Name still retains a profit share in excess of 50%

             Winding down. Just as a Name can accelerate the winding down of his trading by
              the use of exeat policies to close open years or reduce or terminate his participation
              in a syndicate, the single Member of an LLP can do likewise, as he alone is
              interested in the LLP‟s capacity. In the case of a Group LLP, the capacity
              contributed is pooled and each Member is interested in it. Unless therefore all the
              other Members wish to run down the underwriting, or the Member has majority
              voting rights, he will be faced with resignation and waiting out the natural closure of
              the open years of the syndicates or otherwise accepting the position of being unable
              wind down.

             Disputes. Business partners can be difficult bedfellows when capital and profits
              come under pressure or losses occur. Trading at Lloyd‟s is volatile and the levels of
              FAL, Lloyd‟s capital requirements, profits and losses and risk can alter unexpectedly
              and rapidly. The Members of a Group LLP may find their assets outside Lloyd‟s are
              on call for contributions and themselves in disagreement with other Members over
              the running of the LLP.

17. Conclusion
       Single Member Lloyd‟s LLPs certainly carry less baggage compared with Group
       Membership LLPs. It is suggested that the introduction of family Members be deferred and
       that it is best dealt with by Will.

       Limited Liability Partnership, even in single Membership, is not as simple and transparent
       as often claimed. Other personal wealth is still at risk in practice. Indeed it is felt that the
       Application to Lloyd‟s for Limited Liability Partnership should be delayed until the
       Converting Name has sufficient other personal wealth available to meet the extra demands
       on him that can arise during the period of Interavailability, and indeed afterwards. Many
       Names might think that Limited Liability Partnership was not worth the trouble and
       expense. The risks for the Unlimited Liability Name have been greatly reduced for the
       reasons mentioned at the end of Section 12 above.

       However, it is the possibility of having to pick up the tab, should the limited liability
       corporates, including Namecos, SLPs and LLPs, default so exhausting Lloyd‟s Central Fund
       and leaving Names exposed to calls to the full extent of their other personal wealth to meet
       the shortfall, which has persuaded many Names to go limited.

       Where the vehicle of Limited Liability Partnership might be attractive to the prospective
       Member is in the continuation of underwriting at Lloyd‟s after his death (by way of
       testamentary legacy or trust) for the benefit of the spouse and/or other family Members, with
       business property relief in respect of IHTax in the future, particularly in the case of a
       discretionary Will trust, as described in Section 15 above.

       -------------------------------------------
       I am indebted to Ian Wadhams and Julie Burling of Ingenhaag LLP, Chartered Tax
       Advisers, of 22 Eastcheap London EC3M 1EU for reading through the income tax aspects.


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     I should be very happy to talk to Members on any matters covered by this article,
     gratuitously since I am not in practice.

     Tel: 01580 752110.
     email: robertstapyltonsmith@onetel.net

     Robert Stapylton-Smith LLM (lond)
     Hawkhurst, Kent.
     Retired Solicitor and former partner
                    with Thomson Snell & Partners
     Solicitors Tunbridge Wells, Kent
     20th February 2011.

     DISCLAIMER

     This paper is not intended to provide specific technical advice and it should not be construed
     as doing so. It is designed merely to alert readers to some of the issues covered and not
     intended to give exhaustive coverage of the topics.

     The High Premium Group, a membership organisation, and Ian Wadhams and Julie Burling,
     accept no responsibility in the distribution of this paper and the Group, they and the Author
     are no substitute for qualified legal, accountancy and other professional advice which
     recipients are strongly urged to take before relying or acting on its content.




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