Partnerships have the qualities to become a formidable alternative to trusts in 21st century succession planning, writes Rebecca Waterhouse
Historically, succession planning structures have been heavily reliant on trusts. However increased taxation and complexity in the UK (and the associated compliance costs) in relation to trusts has lead wealthy individuals and their advisers to consider alternative options. There is much talk of family investment companies, but family partnership structures are also being used to manage multi-generational wealth.In particular, limited partnerships, established under the Limited Partnerships Act 1907, have proved most popular for family succession planning and wealth management, although general partnerships and limited liability partnerships could be considered too.
In the simplest legal terms, an English limited partnership is a relationship between two or more persons (at least one person being a ‘general partner’ and one person being a ‘limited partner’) carrying on a business in common with a view to profit. A family limited partnership (FLP) is not a separate legal entity. Mere co-ownership of assets is insufficient to constitute a business and so there must be an element of management of the partnership assets involved in order for an FLP structure to be appropriate. Generally, the business of an FLP will be holding and managing the underlying partnership assets.
An FLP will have two categories of partners: one or more general partner (who manage the business of the partnership); and one or more limited partners (who do not participate in the management of the partnership and who have limited liability).
An FLP will act as pooled investment vehicle as all assets are assets of partnership, not of individual partners. This can offer better and/or more cost effective investment options for families than investing individually. Partnership asset and investment management decisions will be made by the general partner(s), who will usually be the head of the family or a group of key family members. As the general partner has unlimited liability, often a limited liability entity is used.
There are many benefits to using an FLP, but the key points are arguably the opportunities for continuity, privacy and flexibility and the relative simplicity of tax transparency.
Unlike trusts in many jurisdictions, there is no rule against perpetuities for FLPs. This facilitates long term succession planning over many generations as the FLP can exist for an unlimited duration and will continue until it is terminated by the partners. The transparency and opportunity for equality between partners also means that younger family members can be exposed to discussions relating to wealth management, although they are not permitted to partake in investment and management decisions to retain limited liability. However, in contrast to the traditional trust structure (where much of the investment strategy and management may be dealt with by trustees) there is potential for a greater exposure for future generations which may help in the continuation of a cohesive family wealth management strategy across the generations.
Privacy and flexibility
To avoid confusion or disputes, the relationship between partners of an FLP should be set out in a Partnership Agreement. The Partnership Agreement can be amended over time and new partners may join as the family grows. This constitutional document will be private and minimal filings are required to be made to Companies House(although the names of partners will be publicly available). In the UK, the level of information that needs to be filed and recorded in relation to an English FLP typically results in less information being publicly available than if an equivalent family company structure was used. (By contrast, a general partnership has no filing requirements).
Crucially, FLPs are very flexible as partners decide how income and capital profits are to be allocated and distributed to each partner. While all of the profits must be allocated between partners, distributions can be made as frequently or as infrequently as is decided. Distributions maybe prescribed in advance in the partnership agreement or they may be flexible, for example, determined at the discretion of the general partner. This enables the general partner to control the flow of cash to partners. Distributions can even be limited to extent of tax liabilities, effectively accumulating profits after tax for re-investment.
For income tax and capital gains tax purposes, FLPs are treated as tax transparent and so profits are taxed in the hands of the partner to whom they are allocated. The amount of tax that each partner pays is determined by the amount of profits that are allocated to them, rather than distributed to them. Where younger members of the family who are basic rate tax payers are allocated profits this can increase tax efficiency. The general partner can retain control as to when distributions are made to limited partners. In each year, the general partner(s) may decide to pay cash equivalent to 100 per cent of the allocated profits to partners or may prefer to retain cash within the partnership for reinvestment.
However, as the saying goes ‘everything comes with a price’. And in relation to FLPs the price is quite literally that. The costs of establishing and managing a partnership structure are more significant than trusts or general partnerships. FLPs are likely to be classified as collective investment schemes and therefore operator functions may need to be delegated to offshore providers or FCA regulated operators, further increasing costs. However, at the point at which the benefits begin to outweigh the expense (usually when the assets of the partnership are likely to be in the tens of millions) FLPs provide an effective flexible alternative to trusts for the 21st century family.
Rebecca Waterhouse is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP