Is it time to FLiP? An introduction to Family Limited Partnerships

Family Limited Partnerships (FLPs) are an attractive alternative investment structure to Trusts. FLPs have developed in the UK following unfavourable changes to UK Trust Tax Law in 2006.

FLPs should be considered by wealthy families or individuals with net worth in excess of £2M and where Inheritance Tax (IHT) planning is required to prevent a 40% tax charge on the value of those assets on the death of the owner. This is particularly useful for assets that do not otherwise qualify for Agricultural Business Relief (ABR) / Business Property Relief (BPR), e.g. unit trusts, investment properties, equities and cash.

FLPs allow assets to pass to the next generation, thereby escaping the IHT net. However, crucially, settlors retain control of the assets gifted.

In a recession environment, where exposure to creditors may be a live consideration, this structure may also put assets beyond the reach of creditors of settlors.

What is an FLP?

It is usually a Limited Partnership, which may be incorporated in Northern Ireland under the Limited Partnership Act (1907). This involves two classes of partner.

Firstly, the General Partner, who retains control and management of the assets, but does not participate in the benefits of the assets (beyond a small annual administration fee).

Secondly, Limited Partners, who have no involvement in the management of the assets, but in return are protected by limited liability. Limited Partners receive income and capital from the assets, as determined by the General Partner, in accordance with the provisions of the Limited Partnership Agreement.

The General Partner is usually a limited company, to provide limited liability protection. The directors of the General Partner are usually the settlors, who thereby retain control over the assets in the Limited Partnership.

The Limited Partners are usually the children of the settlor(s), who benefit from the income and capital generated by the assets in the Limited Partnership. However, it is always up to the General Partner (acting in accordance with the provisions of the Limited Partnership Agreement) to decide when these benefits may be enjoyed by the Limited Partners.

Tax Advantages

• All gifts into the Limited Partnership are Potentially Exempt Transfers (PETs). Such gifts are outside the settlors’ estate, for IHT purposes, after seven years and therefore escape any IHT liability. Taper relief is available after three years. Insurance is available to cover any potential IHT liability arising, should the settlor(s) die in the 7 years following the gift.
• Particularly useful for non-BPR/APR assets, such as investment property, cash, unit trusts and direct equities.
• No chargeable lifetime tax (20%), ten-year tax charge (6%), or exit charge (up to 6%), therefore major tax advantages when compared to a discretionary trust structure. Limited Partnerships also benefit from the full annual exemption for Capital Gains Tax purposes (double that available to Trusts).
• The Limited Partnership structure is generally tax-transparent. Limited Partners are taxed on the benefits they receive at their own marginal rate of tax. Therefore, income may be managed to fall below the annual personal allowance threshold or the current 40% (50% from 2010-11) income tax threshold. Tax liabilities may be paid by the Limited Partnership, to allow beneficiaries to receive sums not subject to any further UK tax.
• Investments may be geared towards capital rather than income, to take advantage of the 18% flat rate of UK Capital Gains Tax.
• Off-shore options are available for advanced tax planning.

Other Benefits

• Control remains with the first generation. Therefore, the settlor(s) can determine the appropriate time for the Limited Partners to receive the benefit of income or capital.
• The value of the assets gifted may be discounted further, by the settlor(s) gifting interests in a Limited Partnership, rather than actual assets.
• The creditors of the settlor(s) will not usually have recourse to any assets transferred into a Limited Partnership.
• The ex-spouses or creditors of Limited Partners may not have access to the full value of the assets in the Limited Partnership. The General Partners will retain control over distributions to Limited Partners.
• The fee level for the establishment of a Limited Partnership is similar to that of a Trust. These structures may be implemented in Northern Ireland at a fraction of the cost for a similar structure on the UK mainland or off-shore.
• An FLP is a Collective Investment Scheme, with an FSA-regulated fund manager actively managing the assets. Therefore the assets are professionally managed to maximise returns.

Conclusion

FLPs should be considered by anyone with potential exposure to IHT, i.e. anyone with a net worth in excess of £2M.

FLPs are a viable alternative to Trust structures (in certain circumstances) and are gaining in popularity and use in the UK.

Tughans can provide the full range of services involved in the establishment and administration FLP structures, to include structure documents, wills, property and other asset transfers. We can also work with existing IFAs or Accountants or with IFAs and accountancy firms known to us with experience of FLPs.

If you would like any further advice or information in respect of FLPs, please contact Vicky Dummigan on 028 9055 3393 or by email, vicky.dummigan@tughans.com