Family Investment Partnerships (FIPs): What you need to know

Why establish a FIP?

“Family Investment Partnership” or “FIP” is a term used to refer to a partnership arrangement which holds family investment assets.

FIPs can allow the value of such assets to be passed on to the next generation in a controlled manner, reducing the value of the older generation’s estates for tax purposes whilst placing restrictions on the access the next generation has to the wealth.

The younger generation are often children or grandchildren but this note refers to children for simplicity.

Whilst FIPs are less well known than Family Investment Companies or trusts, they can be very effective when used correctly.

They have particular value when the alternatives are unattractive, such as in the context of UK/US planning where:

• Family Investment Companies are often not viable because they can fall foul of the “Passive Foreign Investment Company” rules in the US and, even where those don’t apply, different tax treatment in the UK and the US can result in what is effectively double taxation; and
• trusts can sometimes trigger an immediate inheritance tax charge (at a rate of 20%) in the UK when funded and even once up-and-running, mismatches between the way in which the UK and US tax trusts can again result in double taxation. Family Investment Partnerships can solve these problems because their tax treatment is aligned in both jurisdictions (they are generally transparent in both the UK and US for income tax and capital gains tax purposes). This makes it much more straightforward to claim appropriate tax credits/treaty relief where needed and avoid double taxation.

Regulatory treatment

There have previously been concerns as to whether FIPs could fall within the UK’s regulatory regime for collective investment schemes. However, the UK regulator (the Financial Conduct Authority) has issued favourable guidance for family investment vehicles which invest only private wealth.

Ongoing operation

The FIP documentation can place restrictions on how partnership interests can be dealt with (e.g. limiting the ability of the children to use them as security for debts, or to transfer their interests to others). It will also usually give the general partner(s) (i.e. the older generation) control over the day to day running of the FIP (such as how its funds are invested) and how value can be extracted.

Whilst the children are young, the older generation will often use this control to retain most of the profits in the FIP, only distributing what is necessary for the limited partners to settle their personal tax liabilities.

Over time, the children can be allowed more access and input as they become more mature. It may be appropriate to transfer the general partnership interests to them in due course, or simply wind up the FIP entirely once it has served its purpose.

We have referred elsewhere to the fact that FIPs are generally tax transparent. Whilst this is often seen as an attraction, it also has several practical implications which need to be taken into account. For example:

• Because the limited partners will be liable to tax on their share of profits, they will usually have tax reporting obligations (even if very young).
• The fact they need to report their profits and resulting tax liability also means they will usually have full visibility on what is in the partnership and what their interest in it is worth

Like other forms of wealth structuring, there are also ongoing compliance and administrative obligations for the partnership itself.