Natasha
 So passing wealth from senior generation to children can bring down a lot of tax, especially if you leave it until death. We often talk to our clients about passing wealth during lifetime and, quite reasonably, they can say, “I'm going to give that away too soon. I don't want to do that.”

We often discuss two structures with clients: a family limited partnership and a family investment company. Both provide a structure in which you can give away wealth for tax planning purposes while maintaining control, so that you're not giving away too much too soon. The two structures achieve this in similar ways, although one is a partnership and the other is a company.

With a family investment company, the parents or senior generation maintain control of the vehicle through their position on the board and as key shareholders. Their shares usually give them the main voting rights over what happens within the company, including the declaration of dividends for other shareholders. The children or next generation hold other classes of shares that carry the economic value, including rights to dividends and capital on winding up. They have very limited rights to be involved in the running of the company. They do not have control, but they do have the economic interest.

A partnership achieves a similar outcome in a different way. Here, the general partner, usually the senior generation, manages and controls the partnership completely, deciding when the limited partners, typically the children, can receive value. A partnership is a slightly simpler model because it is a contractual arrangement rather than a separate legal entity. However, despite producing similar outcomes, the two structures have very different tax consequences.

Kate
 From a tax perspective, family investment companies and family limited partnerships are both effective ways of transferring wealth to the next generation and can be valuable inheritance tax planning tools. However, from an income tax and capital gains tax perspective, they differ significantly. Family investment companies involve two layers of taxation because the company itself pays corporation tax. When funds are extracted, usually by way of dividends, shareholders face an additional layer of tax. Nevertheless, a family investment company can be a good way of deferring tax where profits are retained and reinvested. 

Family limited partnerships do not have the same double layer of taxation. Instead, they are taxed on a transparent basis, meaning the partners are taxed directly on income and capital gains as they arise within the partnership. UK resident partners may therefore be subject to income tax at rates of up to 45% if the structure generates significant income.

Dan
Other factors to consider when choosing between a family investment company and a family limited partnership include asset protection, privacy and regulatory issues. Jurisdiction is particularly important. These structures do not have to be established in the UK and clients are often encouraged to consider jurisdictions that may better suit their needs.

Certain jurisdictions can offer asset protection benefits, for example through firewall legislation that helps protect structures from foreign judgments. Others may provide more favourable regulatory regimes that require less disclosure and therefore offer greater privacy. We often compare multiple jurisdictions because the rules vary between countries and change over time.

All of these factors should be considered as a whole before deciding on both the structure and the jurisdiction. Key considerations include the client's long-term objectives, asset profile and tax residence position to ensure the chosen structure and jurisdiction best meet their needs.