Family limited partnerships: succession planning for US families in the UK

Changes to the UK inheritance tax rules brought in from 6 April 2025 have made traditional trust planning much less appealing for many non-UK families moving to the UK. Due to advantageous provisions in the US-UK estate tax treaty, Americans are generally in a better position than many arrivers to the UK, but even so, the longer an American has been in the UK, the less attractive trusts become. Family limited partnerships can provide a good alternative and are particularly helpful for American families.

Why FLPs can work well for US families in the UK

One of the main reasons family limited partnerships are ideal for US / UK families is that both the US and the UK tax partnerships work in very similar ways. In both countries, the partnership is treated as transparent for income and capital gains tax purposes, which means the limited partners pay tax personally on the income and gains as they arise within the partnership. This makes it much easier to line up the taxes in both jurisdictions and claim foreign tax credits, something that’s much harder with trusts or corporate structures.  However, the UK has different rules around taxing minors than the US, so if any of the limited partners are under 18, careful thought is required to ensure the planning does not create more issues than it solves.

Establishing the partnership

In setting up the partnership, the transfer of the limited partnership interest will be a gift for both US and UK purposes. On the UK side, as long as the person making the gift survives by seven years, there will be no inheritance tax to pay on the gift. On the US side, families often use the gift of a partnership interest to make use of the US estate tax exemption amount, which is currently $15 million, indexed annually for inflation.  This type of planning is often referred to in the US as an 'estate freeze' as it allows future growth to happen outside of the donor's taxable estate. 

A key difference, though, is capital gains tax: in the UK, gifting the interests in the  partnership is a disposal and can trigger an immediate tax charge. In the US, a gift is not a disposal for capital gains tax, causing a mismatch going forward in the base cost of the partnership assets. This is why many clients decide to gift cash, as that will not trigger capital gains tax in the UK. 

Another important point in setting up the partnership is control. Certain rights or powers kept by the donor can cause the IRS to argue that the donor never really gave the assets away, meaning those assets could still be considered part of their US taxable estate. In setting up the family limited partnership, we need to think carefully about the roles we build into the partnership and who takes those roles on, to ensure the structure works as intended for US estate tax purposes.

Comparing FLPs to FICs

When discussing succession planning with clients, we are often asked about family investment companies, which are also useful vehicles for passing assets to younger generations while maintaining control. However, they are usually not the right fit for US clients living in the UK because of the differences between how the two jurisdictions tax companies. To make things more complicated, a FIC can also be classified as a passive foreign investment company, or PFIC, for US purposes. That will trigger higher tax rates as well as additional reporting requirements for the US family members. For most US/UK families, partnerships tend to be a more straightforward option.

Final comments

As well as being particularly tax efficient for US/UK families, family limited partnerships can also help to introduce younger family members to all or some of the family wealth in a controlled manner. Limited partners will need to put their own wills in place to ensure their interests in the partnership are dealt with tax efficiently which can also start discussions around succession planning for the next generation.

If you think a FLP might be a suitable structure for your family, please do get in touch and we would be very happy to see how we can help you.