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Family Limited Partnerships

Many people like the idea of creating a trust as part of their succession planning. Trusts enable wealth to be set aside for the next generation, but at the same time they can be extremely flexible and be tailored to a family's changing circumstances and needs (for instance, the trustees can be given discretion about the timing of distributions of income and capital, which may be important in the context of younger or more vulnerable family members).

Creating a trust, however, has been made increasingly unattractive for a UK domiciled individual. Since 2006 almost all transfer of assets into trusts have been "chargeable lifetime transfers". This means that where the sums settled into the trust exceed the nil rate band (currently £325,000) there will be an immediate inheritance tax charge of 20%. Moreover, there may also be a charge of up to 6% on the value of the assets in the trust every ten years.

Whilst the tax implications in establishing a trust have become increasingly unattractive the need for a mechanism to pass assets to the next generation in a controlled manner has not diminished. Families and their advisers have, therefore, looked at other vehicles to achieve the same aims as a trust but without the tax disadvantages – one such structure that has come to prominence is the "family limited partnership" (FLP).

In essence, an FLP is a "limited partnership" formed among family members with a view to holding investments and/or assets for the benefit of the family. As well as family members, the partnership would also comprise a "general partner" which would have a small interest in the partnership but retain management responsibility of it. The general partner would usually be a company owned by members of the first generation in the family, and this thereby enables them to retain control and management of the underlying assets.

Other family members (e.g. children) can be given a share in the partnership (and hence a share in the income and capital) when it is first set up; or, alternatively, this can be delayed until it is felt that the time is right. At a future point management and control of the assets could also be passed to the younger generations of the family by appointing them as directors of the general partner.

In conclusion, FLPs can offer an alternative to a traditional trust as a means of passing wealth down the generations, and their key advantage is that they avoid the immediate inheritance tax charge associated with creating a trust. However, they do present their own complexities and these need to be carefully considered before establishing one – professional advice should always be sought. Fladgate is experienced in giving advice on estate planning.h

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