Rob

So you may hear advisors refer to entities as a FLP - a family limited partnership or an FLP. And these structures, although they sound different, are one of the same entity. What they are is a limited partnership, and the word ‘family’ being popped at the front doesn't actually have any technical meaning.

So, for clients who are familiar with limited partnership structures, particularly those from the private equity industry, they're quite simple structures to understand. A family limited partnership is a means of collectively holding family assets, and it's an effective way of dividing the economics from the control. So what that means is where an individual wants to give away assets to get the value out of their estate for inheritance tax purposes, it allows them to still retain a degree of control over how those assets are invested or distributed.

Typically, the way that we do that is through the FLP structure, whereby we have a general partner and a limited partner. The general partner is responsible for the management of the family limited partnership, and typically this will either be an individual or most often a corporate entity, with the shares being held by the individual that's giving assets away.

Those shares can then be left under the individual's will, meaning that they can pass in future, to future generations of the family, and a limited partnership is an evergreen structure. The limited partners do not have any management rights, so they are not able to control if, or when they receive distributions from the structure. Indeed, if they have management rights, they actually lose limited liability status.

So, it is very important that they are not involved in any meaningful way with the management of the structure.

Ed

One advantage of FLPs is that they can offer a degree of privacy depending on the jurisdiction in which they're established. And that might be particularly attractive in the case of minor children where they're becoming limited partners.

So FLPs are from a regulatory perspective, collective investment schemes, which means they fall to be regulated by the Financial Conduct Authority. However, where you only have family members as members of the arrangement of a FLP and you've drafted the documents in the appropriate way, the FCA has indicated that they won't seek to regulate those particular kinds of arrangements, and that takes away what otherwise would be a significant administrative burden from the running of the FLP. 

So when it comes to the taxation of a FLP, the first thing to think about is setting it up. Now, when a parent gifts assets into a family limited partnership, if that parent is the only limited partner, then that's tax neutral. They will be treated as continuing to hold the assets. When the parent then gifts the interest in the FLP to the child, that's going to be a disposal for capital gains tax purposes, and also a potentially exempt transfer for inheritance tax purposes.

So if the underlying assets are standing at a gain, the parent might realise a gain, which is chargeable to capital gains tax, and because it's a potentially exempt transfer, that means that the parent needs to survive the gift by seven years in order for its value to fall completely outside of their estate for inheritance tax purposes if they died.

So once the FLP has been established, the next question is how it's taxed on an ongoing basis. One of the first things to know is the FLP itself isn't taxed. It's the limited partners of the FLP which will be taxed. FLPs treated as tax transparent for UK tax purposes. What that means is that each limited partner, or there might just be one, is treated as owning a proportionate share of the FLPs assets depending on their share in the FLP as a whole. If the FLP receives income, a partner is treated to receive some of that income depending on their share, and if the FLP realises capital gains, then the partner is treated as realising a proportionate capital gain as well, and they're taxed on an ongoing basis in that way. The only thing to note is that where you've got minors who are limited partners and they've received their limited partnership interest from a parent, then the income which arises technically to the minor will still be taxed on the parent until that minor reaches the age of 18.

Ceri

So we've used family limited partnerships as succession vehicles for over 20 years in our UK practice, and even longer in some of our other offices. 

When do we advise our clients to think about them? I think there are three main scenarios in which we would look to use them. One is where you want to pass on assets to your family members, but you don't want to pass on control. Family limited partnerships have a mechanism that allows you to do that.

The second is when you might ideally want to set up a trust structure, but for tax reasons, you can't do that. We've seen lots of tax changes in the UK over the last ten to twenty years that have made it increasingly difficult for families to set up trust structures to provide for their families. The partnership is therefore an important alternative that doesn't come with those tax disadvantages.

We find it particularly useful for US-UK families where you're managing two different jurisdictions' tax issues. We also find it useful for jurisdictions where trusts aren't well known or understood.

The third reason why we often set up family limited partnerships is for asset protection. You can draft bespoke provisions into the terms of your limited partnership agreement that can help protect the assets that you're giving away for the long term for your family.