Keep it in the family

Andy Kirby goes through the benefits of family partnership arrangements as part of estate planning.

Over 630,000 family estates have seen a significant drop in asset values since the downturn in July 2007. Taking into account the fall in property markets and equities, this equates to almost £1billion being wiped from potential inheritances.
While some clients may be waiting for property prices and asset values to recover before considering their estate planning, they could actually be benefitting from significant tax savings by planning their inheritance now and utilising depressed asset values.

The traditional way of safeguarding assets from IHT is gifting them to the intended beneficiaries by the use of family trusts. As long as the person making the gift survives for seven years, the asset will fall outside of the estate for IHT purposes and therefore result in a 40% IHT saving. Often it is also possible to defer any Capital Gains Tax (CGT) charge which would otherwise occur on the disposal.

However, for wealthier clients, who may wish to gift more than the threshold, a transfer onto trust in lifetime may incur an immediate charge to IHT. Since the Finance Act 2006, which created a number of difficulties for clients wanting to mitigate IHT, lifetime trusts now incur a 20% immediate tax charge if the amount being gifted is above the IHT threshold, £325,000 from 6th April 09. In addition to this charge, there is also an ongoing periodic charge to IHT levied on the underlying capital value of the assets.

When gifting an asset outright to individuals, the donor also loses control over the assets, which may be of concern to a client who is gifting to, say, a son or daughter who they don't feel would use the money responsibly at the time of gifting or who has entered into a troubled relationship and you don't want the partner to have claims on the assets.

Family partnerships
There is an alternative to traditional family trust arrangements which may prove to useful, without the potential loss of control over assets in the meantime - that of family partnerships.

So how does the concept work? The older family members, and asset holders, form a partnership and gift interest of the partnership to the younger family members and intended beneficiaries. Under the terms of the necessary partnership agreement, the younger members are incapable of accessing the capital until attaining a specified age, or satisfying some other contingency. There is also likely to be provisions within the partnership agreement preventing the transfer of partnership assets to anyone other than ‘permitted persons', which might exclude anyone under a particular age or beneficiaries' partners.

It will be necessary to consider whether the partnership is carried on as an ‘ordinary partnership' or as a ‘limited liability partnership'. The latter does, of course, limit the potential exposure of a limited liability partner to the extent of his capital contribution to the partnership but this may be of limited attraction where the potential exposure to creditors is considered to be minimal. A limited structure is also required to be registered at Companies House and the accounts a matter of public record.
The ordinary partnership model is simpler and may be preferred if there is only one type of asset and it only needs protecting for a short period of time. Whereas, the limited partnership is often more appropriate when dealing with different types of assets for a longer period.

The initial transfer of the partnership interest to the younger family members, either wholly or in part, represents a Potentially Exempt Transfer for IHT purposes. There will, therefore, be no immediate charge to tax, irrespective of whether or not the value of the transfer exceeds the Nil Rate Band at the time, now £325,000, which is why these vehicles are often particularly suited to higher value cases. Subject to surviving the usual seven year period, the value of the amount given away will escape any charge to IHT on the donor's subsequent death.

Unlike lifetime trust structures, there is also no ongoing periodic charge to IHT. However, trusts do provide greater flexibility and remain more suitable for making provision for minors. Also, in terms of capital gains tax, the gift of the partnership interest represents a disposal and therefore may trigger a CGT charge on any inherent gain. Income tax and gains would be attributable to the members of the partnership in the ratio in which the interests are held.

As the partnership must meet the requirements laid down in the Partnership Act 1890 - being a relationship "which subsists between persons carrying on a business in common with a view to profit" the family partnership structure is not suitable for all clients as it is not sufficient just to exist as a format in which to hold investments. However, it may provide significant tax savings and benefits to many clients but we would always advise seeking professional legal advice.

Andy Kirby is tax and trust manager at Moore Blatch Solicitors