Family Limited Partnerships

What is an FLP?

An FLP is a Limited Partnership established with a view to holding investments and/or assets on behalf of a family. A Limited Partnership is a form of partnership, the partners of which comprise the General Partner with unlimited liability (although liability can be limited through the interposition of a company) and Limited Partners whose liability is restricted to the amount of capital contributed by them.

Ordinarily, the General Partner will be responsible for the management of the partnership and is often first generation whilst the Limited Partners will be second or subsequent generations.

Family partnerships can be established in the UK under the Limited Partnerships Act 1907, or alternatively in the Isle of Man under the Partnership Act 1909. The characteristics of an FLP is very similar for both jurisdictions and for both jurisdictions, an FLP is likely to be treated as a collective investment scheme for regulatory purposes. It is therefore necessary to have at least one licensed service provider.

UK Tax Treatment

FLPs are transparent for income tax and capital gains tax purposes. For generation skipping, it should be noted that the gift of an FLP interest is treated as a potentially exempt transfer and provided that the donor survives for seven years after the transfer, no IHT will arise (this compares very favourably with IHT imposed on monies settled into a trust). In addition, the assets placed into the FLP will not be subject to the ten yearly IHT charge although it should be noted that each partnership interests will be included in the estate of that partner for their IHT purposes. Usually, the Limited Partner will be at least second generation so further planning opportunities will arise for that Limited Partner’s estate planning.

For Capital Gains Tax planning, FLPs are particularly suited for tax planning on assets that qualify for business asset holdover relief.

Stamp Duty Land Tax is not payable on the transfer of land into an FLP as long as the partners are connected for the purposes of the relevant legislation.

Advantages and Disadvantage

In addition to some of the UK tax advantages mentioned above, FLPs when properly structured can be flexible and will provide limited liability. They enable donors to keep “control” of assets and withdrawals can be controlled where an appropriately drafted partnership agreement is utilised.

Contract law will apply to FLPs and in this regard they are a different “animal” to trusts. It is also unlikely that an FLP will endure as long as a trust.

FLP’s must be run as a business with a view to a profit and therefore they are not suited as mere holding structures. However, they are suited to where real management of assets takes place; for example, property investment.

Regulatory Considerations

Limited partnerships are treated as collective investment schemes both in the United Kingdom and the Isle of Man because the day to day management and control of the partnership is separate from the Limited Partners. Regulated activities may only be performed by the appropriately authorised persons.

There are essentially two aspects to the management of the FLP that will require regulatory oversight (although it is not necessary for these to be separated):

• the investment management;

• the administration or day to day management.

How IFG Can Help

As a licensed service provider, IFG can provide administration services for the partnership, as well as provide corporate administration services to the company acting as the General Partner. We can also act as trustee of any trust formed to own the company acting as the General Partner. Our long standing expertise in the offshore environment enables us to understand and blend the nuances of good service with good corporate governance to ensure that the FLP is properly administered.

Summary

In certain circumstances, FLPs have clear IHT advantages and potential CGT advantages. They also provide a neat and long established mechanism for the transfer of wealth in a relatively tax efficient way, whilst reserving a certain amount of control at first generation level.

IFG International Limited has significant experience in the administration of a wide range of complex trusts, companies and partnerships.

IFG does not provide taxation or legal advice. The information and expression of opinion expressed in this briefing note are not intended to be a comprehensive study or to provide taxation or legal advice. Specific active concerning individual situations should be taken and IFG can provide introductions to advisers who specialise in this area.