The Family Limited Partnership Concept

UK TAX

A new era begins… Jay F Krause and Sophie Dworetzsky consider the use of Family Limited

Partnerships

O

n 22 March 2006, Gordon Brown, then Chancellor and now Prime

benefit remains sophisticated succession

Whether a CGT

planning by enabling the transfer of

Minister of the UK, ushered in a

wealth across generations, while conferring asset protection.

charge applies to a gift of FLP

new era. The day, of course, was Budget Day, and the new era one subjecting trusts, used in Britain since the middle ages as a means of protecting family wealth across generations, to a punitive tax regime. To recap, notwithstanding that the Budget Day proposals were significantly modified, in large part courtesy of vigorous lobbying by STEP, Finance Act 2006 generally subjects lifetime transfers into trusts to an immediate

interests depends

While the tax regime may have changed dramatically, the need for succession

upon the nature of the FLP assets.

planning remains. Inspired by an American

No CGT charge applies to gifts

concept, Family Limited Partnerships (FLPs) offer a tax neutral vehicle for collectivising family investments, transferring family wealth and protecting assets. As FLPs are income and capital gains tax transparent, they do not

where the FLP holds cash or assets eligible for business

inheritance tax (IHT) charge at 20 per

lend themselves to facilitating the abuses perceived to be offered by trusts.

asset taper relief (BATR) (provided

cent and to six per cent charges every ten years. These changes apply equally to UK

Overview

‘holdover relief is elected for BATR

While numerous variations abound, a

assets). For FLPs

no longer available on transfers into settlor

typical FLP structure might involve family members contributing assets to a specially

comprised of other assets, a gift of

interested trusts, such that capital gains tax (CGT) may apply at up to 40 per cent on

tailored limited partnership in exchange for limited partner interests and a family owned

a limited partner

transfers into trust. The combined effect could lead to an effective tax of up to 60 per

company subscribing for the general partner

domiciliaries and deemed domiciliaries. Also effective from 6 April 2006, holdover relief is

interest would trigger CGT on the interest transferred; this compares favourably

cent on an initial transfer into trust. These new tax charges arise, in large part,

(GP) interest. The senior generation could then gift as much or as little of their limited partnership interests to younger generations

from a misconception that UK domiciled and deemed domiciled individuals utilised trusts

as and when they see fit. The gifts are ‘potentially exempt transfers’

primarily to effect income and capital gains tax benefits, rather than to provide a safety

(PETs) and will fall completely outside the senior generation’s chargeable estates

net for younger generations. In reality, as readers are well aware,

for IHT purposes, provided the transferor survives seven years from the gift (each

and gains derived by the FLP, the partners are subject to tax on an arising basis on income and gains accruing with

the situation is rather different. Trusts originated as a means of protecting family

year after the first three, the portion of the PET subject to IHT reduces by 20 per cent

respect to their partnership share. The partnership essentially is a ‘look

assets while the leader of the family was unable to attend to such matters, and

annually so real savings are achieved from the start of year four).

through’ for UK tax purposes. Limited partners’ liabilities in terms of

tax had no part to play in matters. Their modern use is more sophisticated, but in essence not wildly different: the primary

Almost any type of business or investment asset can be transferred to a FLP. No IHT or CGT arises on the contribution to the FLP.

partnership obligations are limited to the extent of their capital contribution, provided they take no part in the active management

with trusts, in which holdover relief is not available for transfers into settlor interested trusts and thus CGT would be triggered on the entirety of the amount transferred into trust. With respect to subsequent income

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UK TAX

of the partnership. In order to ensure this

Key provisions

contributions along with registration of

liability protection remains in place for

While each FLP should be tailored to address

the individual partners, and for reasons of practicality, the FLP will be managed by the

specific family needs and concerns, a

transfers of limited partner interests. These requirements generally can be

GP with the limited partners having little,

non-exclusive list of certain key provisions typically of interest includes:

satisfied through the use of nominee arrangements, thereby protecting the

if any, say in day-to-day management of partnership affairs.

Eligible investments. FLPs can invest in

Comparison to trust structures Certain opportunities remain for avoiding

identity of the partners. However, should any asset class including stocks and bonds, hedge and private equity funds, derivatives, real estate, unit trusts, insurance bonds, etc.

additional privacy be preferred, a limited partnership based in another jurisdiction without similar disclosure requirements

and may be of particular interest for family

may be desirable. Additionally, English limited partnership

(i) the nil rate band amount, (ii) ‘normal

businesses anticipating a major liquidity event, such as an IPO or business sale.

law generally prevents a partner from withdrawing capital contributions prior

expenditures out of income’ and (iii) assets eligible for business property relief (BPR).

As FLPs are entirely ‘look through’ for UK tax purposes, they provide an ideal umbrella

to the winding up of the partnership.

Unfortunately, these opportunities are of

structure for holding tax efficient structures,

somewhat limited applicability and still generally result in a six per cent IHT charge

such as OEICs and AUTs, which provide CGT deferral and insurance wrappers to provide

every ten years on assets in trust and/or an exit charge upon distribution.

income tax deferral.

the initial 20 per cent IHT charge on transfers into trust, including transfers of

Transfers into FLPs do not incur IHT

While this may be viewed as desirable in some instances, it also may be viewed as inflexible in other circumstances. Again, a limited partnership based in another jurisdiction without similar withdrawal limitations may be desirable.

Distributions. FLPs provide significant

charges, and assets within FLPs are not subject to the six per cent, ten-yearly

flexibility in dealing with partnership income and gains. Such amounts can either be

Resident deemed domiciliaries. FLPs based outside of England and Wales

charge or to exit charges as FLPs are not

re-invested or distributed according to the

may be of particular interest to resident

‘settlements’ for the purposes of Inheritance Tax Act 1984 and, therefore, not subject to the

needs of the partnership. However, unlike a trust structure, it would not be appropriate to

deemed UK domiciliaries, many of whom have taken a great deal of care to structure

IHT regime for trusts.

look to the individual needs of the partners in

Regulatory considerations

making distribution decisions. Because of the transparent nature of

their investments outside the UK. While in principle an English FLP could work

FLPs are collective investment schemes (CIS) for the purposes of the Financial Services and Markets Act 2000 (FSMA). Accordingly, initial promotion should be undertaken by an entity authorised to promote unregulated collective investment schemes to private individuals. On an ongoing basis, almost all

limited partnerships for UK tax purposes, each partner will be subject to income

authorisations or delegated offshore. Alternatively, in certain limited circumstances, the GP itself may wish to undertake certain of these functions after obtaining the necessary FSA permissions. In practice, the primary aspects of the partnership management role are twofold – namely (i) investment management (Investment Advisor) and (ii) day-to-day management over distributions, redemptions and all other non-investment matters (Operator). These roles can be bifurcated

be consistent with maintenance of offshore investments and investment structures.

tax (IT) or CGT, as the case may be, in line with income or gains arising to their partnership interest. These tax liabilities

Asset protection. We understand that

can be met through annual distributions

to that associated with trusts. As noted, it is not appropriate for the GP to look to

of an amount equal to the liability being made to the partners.

partnership management and investment activities should either be delegated to persons with the necessary FSA

equally well, use of an ‘offshore’ FLP may

FLPs offer asset protection at least equal

the individual needs of partners in making decisions. The GPs discretion is narrow

Transfer restrictions. Most FLP

and looks instead to the investment

agreements would contain customised restrictions prohibiting transfers of

purpose of the FLP. A disgruntled partner seeking to force access to all or part of

partnership interests to anyone other than a specified class of persons.

his share, or to dissolve the FLP, would in practice most likely need to show abuse

Redemptions/winding up. Again, a

or bad faith by GP. Under the envisaged bifurcated management structure this

great deal of flexibility exists in tailoring provisions governing redemption of a partner’s interest and the winding up of the entire partnership itself. Choice of jurisdiction. FLPs may

allowing the option of either a single provider of both investment and management services

be established as English limited partnerships or as limited partnerships under another jurisdiction’s limited

or separate providers. The GP retains the ability to replace both the Operator and Investment Advisor.

partnership law. English limited partnerships require registration of the partners’ names and

would be most unusual.

A new era begins… To return to the beginning, 22 March 2006 marked the end of one era and the dawn of a new one. There is every reason to think that FLPs may very well come to be a hallmark of the new era that commenced that day. Jay F Krause TEP is a principal at Withers Worldwide and Sophie Dworetzsky is senior assistant in wealth planning at Withers Worldwide

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