An FLP is a limited partnership whose partners are members of the same family. An FLP, like any limited partnership, is made up of:

• a General Partner, who is responsible for managing the partnership and its assets; and

• Limited Partners, who will each have an interest in the capital and income of the FLP but will not have control over its management or business. 

A General Partner is usually a corporate entity and a third party service provider is often appointed to administer the General Partner on a day-to-day basis but typically the wealth creator would own the shares in the General Partner, which will ensure that they retain ultimate control over the devolution of their assets. The Limited Partners will typically be children and other family members, whilst the wealth creator would also usually have a minority interest as a Limited Partner.

An FLP is designed to separate legal control of the partnership assets from their economic enjoyment. The legal control of the partnership assets rests with the General Partner – so effectively with the wealth creator. The economic enjoyment of the partnership assets (ie the right to income and capital) belongs to the Limited Partners but is generally at the discretion of the General Partner – this is similar to the relationship between the trustee and beneficiaries of a trust, or the board of directors and shareholders of a FIC.

FLPs are a popular family wealth planning structure as this separation of control and economic ownership enhances asset protection against creditors and mitigates against dissipation by 'beneficiaries' (Limited Partners). A Limited Partner has an interest in the income or capital of the FLP only to the extent that is provided for under the Partnership Agreement – which can be prepared to suit each family's needs and succession plans. In addition, the right to profit will often be at the discretion of the General Partner – therefore even if the partnership interest were to be acquired by a creditor, the interest is only a contractual right and may not be enforceable against the assets of the partnership.

FLPs are usually treated as tax transparent in the UK; Limited Partners are treated as owning a share of the partnership assets proportionate to their interest in the FLP, and are taxed on their share of the profits. Any Limited Partner (but it is typically the wealth creator who does so) may contribute assets to the FLP. A Limited Partner who contributes assets to the FLP will be treated as making a gift to the other Limited Partners – the value of the gift will depend on the Limited Partner's interests in the FLP. It is important to keep in mind that there may be UK inheritance tax or local gift tax implications on the Limited Partner's transfer of assets to the FLP – and on any subsequent changes to the percentage interests of Limited Partners. However, careful planning can mitigate this tax exposure. The primary disadvantage to using an FLP is the additional administrative time and & cost involved when compared to direct ownership of assets.

If we can support you or your clients with advice on investment structures and family governance or other matters, please do not hesitate to get in touch.

This summary is part 2 of our 4-part series on investment structures and family governance. Part 3 will cover Trusts and Foundations and will be available next month.