Family Partnerships - an alternative to trusts?

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15 February 2010

Since the changes to inheritance tax in 2006, advisors have been talking about the advantages of using family partnerships (FPs) as an alternative.

FPs are seen to offer many of the same features as trusts, but (crucially) without an immediate 20% inheritance tax (IHT) charge on their creation.

However, despite these seeming advantages, progress has been slow and few FPs have actually been created. There have been a number of reasons for this and the purpose of this article is to give a candid view of the benefits and pitfalls of FPs.

Our view is that FPs are often worthwhile, but – being more complex than trusts – should not be treated as a "packaged" product. Clients should only consider them if they are prepared to engage fully in the design process.

What is an FP?

A "Family Partnership" is not a term of art. It simply refers to a partnership where the partners comprise one or more members of the same family. As such, a Family Partnership is no different to any other form of partnership.

FPs are typically used as an alternative to trusts, offering many of the same features.

FPs may be structured either as limited partnerships (sometimes called FLPs), general partnerships, or using a Limited Liability Partnership (LLP). The choice between these forms will often involve a balancing act between regulatory and practical considerations.

What are the regulatory issues?

Without going into great detail, FPs may be treated as unregulated collective investment schemes. This could (although unlikely) incur sanctions from the Financial Services Authority and, potentially worse, make the agreement unenforceable.

There seem to be three main solutions to this issue:

  • Use family members rather than professionals as "managing partner"
  • Use a general partnership or LLP instead of a limited partnership and ensure that the "junior partners" have a real say in decision-making
  • Ensure professional trustees have proper CF30 authorisation from the FSA

Why use an FP – tax advantages?

The principal advantage of an FP compared to a trust is, as mentioned, the lack of a 20% IHT charge on its creation. However, if carefully drafted, FPs can offer several other tax advantages:

  • The managing partner can be paid a reasonable commercial rate for work done in managing the partnership unlike a family trustee
  • Assets pregnant with capital gain can, if correctly structured, be added to an FP without an immediate CGT charge
  • The 50% income tax rate does not apply to FPs. Adult partners are taxed at their own rates; minor children at the donor's rate
  • 10 yearly and exit charges (the "6% regime") doesn't apply unlike for trusts
  • Land can be contributed to the FP without a Stamp Duty Land Tax (SDLT) charge, even if the FP takes over any borrowings
  • A limited company can, in some circumstances, be brought in as an additional partner, offering access to lower rates of corporation tax rather than income tax

So why isn't everyone doing this?

The tax advantages need to be balanced against a number of practical factors. Chief among these – as seen above – are the potential regulatory issues. There are a number of other points which also need to be considered such as the need for the partnership to carry on a business, the fact that all partners are agents of the partnership and capital gains tax on any re-allocation of partnership shares. However, in the right circumstances, an FP may prove to be a viable alternative to trusts.

If you would like further information please contact John Barnett on +44(0) 117 902 2753 or by e-mail on john.barnett@burges-salmon.com or Tom Hewitt on +44(0) 117 902 2717 or by e-mail on tom.hewitt@burges-salmon.com.

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