13 June 2018
An alternative to accumulation and maintenance trusts for children?
A Family Limited Partnership (‘FLP’) is a structure that allows a family to transfer economic value in family assets to future generations whilst retaining control over those assets. As FLPs are not considered to be settlements for inheritance tax (‘IHT’) purposes, they are not subject to the upfront charge to IHT on creation or the charges to inheritance tax at rates of up to 6% every 10 years which apply to new trusts.
A trust that qualified as an accumulation and maintenance trust used to be shielded from charges to IHT until a beneficiary became entitled to the income. This favourable treatment ended on 22 March 2006. Although there was a window of opportunity to restructure such trusts to preserve this treatment, the cost of so doing was that a beneficiary had to become entitled to the assets outright on or before age 25.
The prospect of beneficiaries becoming entitled to significant assets at an age that may prove to be inappropriate was unpalatable for many families and their trustees. Many decided to accept what is, effectively, an IHT charge of 0.6% for every year the assets remain in trust as the cost for flexibility. These charges may be an unnecessary expense as there could be an alternative. The same applies for discretionary trusts, which have always been subject to these charges.
The trustees could establish a FLP and appoint the limited partnership interests, which carry the economic value, to the beneficiaries. This would crystallise a one off ‘exit’ charge for IHT purposes but would avoid charges on an ongoing basis. The trustees would retain the general partnership interest and thus control the flow of income and capital to the beneficiaries. Although FLPs are regulated for FSA purposes, the costs of regulation can compare favourably with the annual 0.6% IHT charge. The benefits are clear: (i) control is retained by the trustees; (ii) ongoing charges to IHT are avoided (remember the value will be included in the taxable estate of the beneficiary); and (iii) holdover relief is available, which will avoid a charge to capital gains tax.