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Family Limited Partnerships
Historically, Trusts have been considered the most appropriate vehicle for passing wealth on to the next generation in a tax efficient manner. However, a series of tax changes now mean that Trusts can be an expensive way of transferring accumulated wealth. As a result families are now looking at alternative ways to achieve the same result but without the adverse tax consequences. Enter the Family Limited Partnership (FLP)...
Family Limited Partnerships – the basics...
The principal idea is that a partnership structure is used to facilitate the transfer by parents or grandparents of family wealth to the younger generation, usually by way of an outright gift to the partnership, the FLP. The wealth transferred can take the form of a variety of assets, such as quoted investments, cash, shares in a property investment company or even shares in a family trading company. The partners of the FLP would comprise both the parents as the general partner, and the children as the limited partners. The limited partners would be introduced to the FLP by each of them being allocated a share or interest in the FLP, but the exclusive rights to manage the FLP business would be reserved to the parents as the general partner. By using a FLP, the following key objectives can be achieved. The transfer of wealth would be a potential exempt transfer for IHT purposes, thereby reducing the value of the parents or grandparents' estate for IHT purposes. The parents as the general partner would retain control over all important matters and decisions affecting the FLP.
The legal structure and constitution of the FLP...
A Scottish Limited Partnership would be formed with the parents appointed as the general partner and the children assumed to be the limited partners. The parents would gift the specific assets to the FLP and the children would be allocated their proportionate interests in the FLP. Although it would be possible for the parents to assume the position of general partner, personally, it is preferable to use a company as a general partner in order to ensure that is has continuing existence. A new company would accordingly be formed to act as the general partner and which would have as its directors the individual parents.
A partnership agreement would be prepared and entered into and which would record that the management and control of the FLP assets would rest with the general partner. This would ensure it would not be possible for the limited partners to withdraw any capital or transfer any of their FLP interests without the consent of the general partner. The entitlement of each of the limited partners to their share of capital would occur on a fixed future date or upon them reaching a certain age the duration of the FLP.
The transfer of assets into an FLP is a potentially exempt transfer and therefore does not trigger any lifetime chargeable rates. If the donor survives seven years it will therefore be out of account for Inheritance Tax purposes and there is no issue of reservation of benefit provided that the underlying assets are owned by the limited partners even if a general partner who is the donor exercises management control. Capital Gains Tax may be triggered on the transfer of assets to an FLP. This would depend on the exact circumstances however holdover relief can be available for business and agricultural property. FLP is transparent for Income Tax and is taxed as income being in the hands of the partner. An FLP will count as a collective investment scheme and as such will require an organisation to act as the operator who is FSA authorised. This service is offered by a number of providers and we can arrange this service with a third party if required.
Scenario A - WAIT AND SEE APPROACH
Mr and Mrs Smith own a successful manufacturing business. They have two children who they wish to pass the assets to and both children work in the business. Mr and Mrs Smith are not yet sure if the children will go on to lead the business or if the enterprise will be sold. They therefore wish to pass the value down to the next generation but retain control and have identified an FLP as the perfect structure to achieve this goal.
Scenario B - PROPOSED SALE
Mr and Mrs Jones own a farming business which they expect to sell within the next few years. Having amassed significant pensions and other assets they are happy to pass the business assets to their children. They do however wish to exercise some control and have been put off a Trust arrangement because of the prevailing tax regime. As a sale of the business is envisaged, they have elected to move the assets into an FLP now, whilst hold over relief is available. When cash comes in from the sale, the value will already have been passed down to the next generation, albeit under control of themselves as general partners.
Scenario C - FAMILY ASSETS - CASH
Mr and Mrs Mackay have inherited significant wealth and wish to provide for their children and grandchildren. They looked at the idea of a Trust, but due to the limited amount which they could pass into it have decided on an FLP structure. This will allow them to pass funds down and pay income out to family members but allow them to maintain overall control of assets for members of the family.
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