Family Limited Partnerships- Silver bullet or rusty nail?

Thursday, June 04, 2009 | Posted by: Grant Thornton
Categories: Personal, Protecting your wealth | Tags: income, trust, Family Limited Partnerships, capital, Inheritance Tax

Family Limited Partnerships have been much talked about since 2006 when the trust rules were significantly altered. But are they all they’re cracked up to be?

How they work
Donors contribute assets to a Family Limited Partnership (FLP) in return for a partnership interest, which they then give away to family members. There must be at least one ‘general partner’ (GP), who has unlimited liability and manages the FLP. The GP may have a small capital interest and income entitlement. Typically, the GP will be a private company owned by the contributor of the funds, with directors who would otherwise take on the role of trustees in a normal trust arrangement. There can be any number of limited partners, who take the majority interest in income and capital. When passing assets to family members the type of entity used has an impact on the tax and reporting requirements of the gift.

Are they any good?
The main advantage of using an FLP is that there is no Inheritance Tax (IHT) charge on the transfer of the assets into the partnership. In addition, there are none of the IHT exit and ten-yearly charges that are now levied on most trusts. The gifting of partnership interests is treated as a disposal of the underlying assets for capital gains tax (CGT) purposes.  While an FLP structure has more restricted deferral reliefs available to it than a trust, it is nevertheless possible to defer a CGT liability in respect of business assets held by the partnership.

Our view
Although FLPs have their place, they can be limited in application, and may only be suitable for particular cases. However, at Grant Thornton, we have devised a number of ways of adapting the basic premise. We can allow for wider applications and greater tax advantages by combining key principles of some of our other capital gains tax and inheritance tax planning ideas. This way, the FLP may be a useful tax planning tool and a viable alternative to trusts.’ Andrew Westhead, Tax Partner, Grant Thornton