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In the United Kingdom, there are a number of legal ways to carry out business activities. The main ones are sole traders, joint ventures and formally incorporated companies.
A sole trader is a person who is self-employed carrying out a commercial activity. Legislation does not strictly define whether a person is carrying out a business activity or simply managing investments, so this point has been the subject of numerous case law. In general, certain criteria, so-called “business distinctions”, are used to determine whether income should be taxed as a business activity or as an investment. As noted in the section on income tax, individual traders are taxed on the profits of their business, along with any other source of income they may have.
A partnership emerges when two or more people agree to operate a joint business with the objective of obtaining benefits. Although there is no specific tax definition, British law considers corporations to be fiscally transparent entities. This means that it is not the company itself that pays taxes, but that the benefits are allocated directly to the members based on their participation and each one pays taxes for their part.
As for Scottish corporations, although they have some legal peculiarities compared to those of the rest of the United Kingdom, their tax treatment is the same.
On the other hand, limited liability companies (LLPs) have a different legal status. Although they are considered legal persons and the partners have limited liability for losses, they are still treated as legal companies for tax purposes, whenever they carry out a business activity.
In the case of a British LLP, it is mandatory to carry out, at least once a year, an analysis to ensure that its partners are considered self-employed and not employed. It evaluates, among other things, whether partners are at financial risks and if they are entitled to share in the benefits of the business.
When a British partner participates in a foreign LLP, HMRC is not guided by that entity's classification in its home country. British courts have established a number of criteria for determining whether a foreign entity should be treated as a corporation or as a partnership. HMRC has a public list of non-British entities together with the decisions it has taken regarding their classification. Although these guidelines are not binding, they can provide useful guidance. However, this topic can be complex, so it is often advisable to consult with specialists.
In fiscal terms, a partner in a partnership is usually considered autonomous. However, if a British LLP has legal entity partners (known as a mixed partnership), specific rules against circumvention may apply. These rules can reassign the benefits of a corporate partner to a natural person if the individual benefits, directly or indirectly, from participation. In the same way, losses can be reallocated from a natural person to a company under certain circumstances.
The British Government has introduced a substantial reform in the way in which the self-employed pay taxes on their benefits. This reform, called “base period reform”, does not affect other sources of income or capital gains, only the treatment of commercial benefits.
Under the old rules, which came into effect in the fiscal year ending April 5, 1996, members were taxed on profits for the 12-month accounting period ending during the corresponding fiscal year. For new members, special rules applied. For example, if someone joined a company on January 1, 2021, they would tax their profits from that date to April 5, 2021 in the 2020/21 fiscal year, with a payment deadline of January 31, 2022. In the second fiscal year, you would tax profits for the full accounting year ended December 31, 2021, and the remaining tax would be paid before January 31, 2023.
This system could generate double taxation on part of the profits (the so-called “overlapping benefits”), which were accumulated and then could be discounted in certain situations: if the partner left the company, if the accounting closing date was changed to April 5 or if the partner entered or left the United Kingdom.
Starting with fiscal year 2024/25, all members must be taxed on profits generated during the full fiscal year, from April 6 to April 5 of the following year, and not based on a separate accounting period. For example, if the company closes its financial year on December 31, a British partner must tax profits corresponding to the 9 months between April 6 and December 31, 2024, and the pro-rated profits for the first 3 months of the next accounting year, that is, from January 1 to April 5, 2025.
In the case of non-resident partners, treatment is similar, but limited only to benefits generated in the United Kingdom. The calculation will be done on a proportional basis, and real figures will not be used for profits for the first quarter of the following year.
To simplify this process, if a company closes its financial year between March 31 and April 4, it is allowed to consider it equivalent to the fiscal year, which avoids complicated estimates for a few days.
During fiscal year 2023/24, the member pays taxes for:
Finally, companies are legal entities that are different from the people who manage them or who work in them. A business operated by individuals or a collective partnership can become a company at any time, which implies a completely different tax regime, regulated by corporate tax rules.
In English law, trusts have evolved over the centuries and are mainly classified into two types: “express” trusts, which are deliberately created through a writing or will, and “implicit” trusts, which arise by application of law or principles of equity. Express trusts are used by individuals for multiple purposes, such as controlling the destination of certain assets, offering financial support to people who cannot support themselves, providing benefits to employees or establishing structures for charitable or educational purposes.
The tax treatment of trusts has changed significantly over time, and today there are few tax reasons for a person resident and domiciled in the United Kingdom to transfer assets to trusts of non-British residents. However, these structures are still frequently used by people not domiciled in the United Kingdom. For their part, trusts incorporated in the United Kingdom continue to be a common tool for people domiciled or resident in the country who wish to financially support their children or grandchildren, while retaining some control over assets.
Until April 5, 2025, when a person not domiciled in the United Kingdom created a trust outside the country with assets located abroad, a tax obligation generally did not arise until a beneficiary resident in the United Kingdom received payments or benefits from the trust. In these cases, capital payments — including benefits distributed from non-resident trusts — were normally treated as income or profits from the trust itself if the beneficiary was a tax resident in the United Kingdom.
However, as of April 6, 2025, within the framework of broader changes affecting the taxation of persons not domiciled in the United Kingdom, income and profits from trusts in which the trustor maintains an interest will become subject to taxation in the hands of the trustor, provided that the trustor resides in the United Kingdom.
In addition, trusts established abroad will also be subject to UK inheritance tax if the trustor has resided in the country for more than ten years, which is considered an extended residence.
Since the regulations applicable to trusts are especially complex, it is highly recommended to have specialized advice in this area.
The United Kingdom incorporated the Fourth Anti-Money Laundering Directive (4MLD) into its legislation through the Money Laundering, Terrorist Financing and Fund Transfer Regulations of 2017. This regulation established two fundamental obligations for trusts:
To meet this second requirement, HMRC launched the Trust Registration Service.
Later, on October 6, 2020, new regulations were introduced to implement the Fifth Anti-Money Laundering Directive (5MLD). These considerably expanded the reach of the TRS and extended access to information beyond security agencies. As of January 2023, HMRC also changed its approach and stopped excluding British trusts classified as collective investment institutions from the Trust Registration Service.
With the 5 MLD, the previous link between registration and the tax obligation was eliminated. Now, all express trusts must be registered with the Trust Registration Service, unless they are specifically excluded because they are “out of scope”.
In addition to trusts established in the United Kingdom, those that HMRC considers to be “administered in the United Kingdom” must also be registered. This includes:
The concept of “obligated entity” encompasses a wide range of professionals, including banks, accountants and law firms.
Information required at registration
The 5MLD distinguishes between trusts registered by obligation under this directive and those called “taxable trusts”, which had already been registered under the 4MLD. All trustees who must register a trust with the Trust Registration Service must provide the following general information:
For trusts not subject to taxation, additional information is required with respect to so-called “beneficial owners”, a category that includes trustees, trustees and beneficiaries in certain situations (for example, those who receive distributions from a discretionary trust or, in the case of trusts with participation in the possession, those who receive income):
Submission and update deadlines
Trusts that existed on October 6, 2020 and that were required to be registered must do so before September 1, 2022.
Most new trusts must be registered within 90 days after they are formed.
When the registration is justified by a tax obligation, the deadline will be:
In addition, taxable trusts must file an annual return confirming that the information recorded is still valid. This return must be submitted before January 31 of the fiscal year corresponding to the tax obligation.
Finally, trustees are required to report any change in data relating to beneficial owners within 90 days of the change.
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