Tom Carey, December 2011
Tom Carey is a Partner in the Corporate & Finance Group (Guernsey) at Carey Olsen in St Peter Port, Guernsey.
Traditionally, family offices have looked, almost exclusively, to trust structures to look after their assets manage their estate planning and preserve their wealth for future generations. However, as investments have diversified and tax implications have increased, trusts have become less attractive. So what are the benefits of structuring a family office as a Guernsey limited partnership, particularly for a UK-domiciled person? And will the proposed changes to the Limited Partnership (Guernsey) Law 1995 (the Law) put Guernsey at the forefront of limited partnership law?
A Guernsey limited partnership (GLP) is formed by a general partner who accepts unlimited liability for the GLP’s debts and one or more limited partners who agree to contribute cash or assets. Their relationship is governed by the contractual arrangements set out in a limited partnership agreement. A limited partner will only be liable up to the amount they have agreed to contribute to the capital of the GLP. It is likely that the limited partner’s interest will allow them to participate in the income and capital profits of the GLP, but the partners may agree the allocation of profits as they see fit.
The limited partners are taxed directly on income and capital gains attributable to their share, which means foreign tax authorities deem the GLP to be transparent from a tax perspective. A limited partner’s interest can be transferred as a potentially exempt transfer providing the contributor survives for seven years. This contrasts with a trust, where a UK-domiciled settlor will incur an immediate 20 per cent inheritance tax (IHT) charge on the initial capital above the nil rate band (presently at GBP325,000) when they set up a trust, as well as ongoing charges of about 6 per cent on each tenth anniversary of the trust.
Under English law, limited partners cannot get involved in the conduct or management of partnerships, but under Guernsey law there are a number of safe harbours. Most important is that a limited partner can be a director or a shareholder of the general partner. Limited partners can also be consulted and can advise the general partner on the business of the partnership. They can vote in various matters involving the assets, business or administration of the partnership without losing limited liability status. This contrasts with the position of settlors and beneficiaries under a trust.
Another valuable feature is that, typically, the Guernsey Financial Services Commission will not treat family GLPs as collective investment schemes that would be subject to regulation, provided that the interests in the limited partnership are held by family members, or employees, and there are restrictions in place with regard to transfers to third parties. There is also the benefit of confidentiality. Family offices are notoriously protective of their privacy, and in Guernsey a limited partnership does not need to file an agreement with the registrar.
For these reasons, there is a trend in family offices wanting to set up in Guernsey as GLPs rather than through a trust. In response to this and to maintain Guernsey’s primacy in this area, Guernsey has approved the proposals presented by the commerce and employment department to amend the Law1.
GLPs have found that when dealing with the tax authorities of certain foreign jurisdictions it is useful to elect to have incorporated status. Currently, a GLP may only elect to have a separate legal personality at the time it applies to be registered. The problem with this is the irrevocable decision. Therefore, it is proposed that the Law be amended to permit GLPs to convert between incorporated and unincorporated status during their lifetime. The conversion will not change the liability of the limited partners or general partner and third parties will not be affected by a decision of a GLP to adopt separate legal personality. It is hoped this will give GLPs the flexibility to suit the most relevant tax environment that they or their limited partners operate in.
The proposals recognise there are circumstances where limited partners ought to be able to take a more active role in the partnership without losing the protection of limited liability. To ensure that limited partners can provide effective oversight of the partnership and to improve corporate governance generally it is proposed that the safe harbours in the Law be expanded to increase the activities that a limited partner can do without losing the protection of limited liability, such as being a member of what the white paper refers to as an ‘oversight committee’.
Merge and Migrate
It is proposed to amend the Law to include provisions which, for the first time, will allow for the amalgamation and consolidation of GLPs on a statutory basis. A GLP will be able to merge with any other business entity, including a company, another limited partnership or a general partnership, provided that 75 per cent of the partners (both limited and general) vote in favour.
The Law will also permit migrations of limited partnerships into Guernsey and the conversion of other entities into GLPs and vice versa, which will authorise companies and other entities to convert to limited partnerships through a single statutory process. As a result, Guernsey will be one of the first jurisdictions to offer migrations and conversions of limited partnerships that will open the way to entities or limited partnerships in other jurisdictions to register in Guernsey and take advantage of its more flexible regime.
Also in the proposed amendments to the Law is the introduction of protected cell GLPs based on the concept of Guernsey’s protected cell company legislation. This will allow GLPs to create protected cells within the partnership, which will segregate rights, powers and duties with respect to specified property or obligations of the limited partnership. It will also permit each cell to have a separate business or investment objective. This feature will be particularly attractive for family offices, as it will allow general partners to establish separate cells for certain members of the family, as well as allowing different investment strategies to be conducted within the one structure without there being a risk of contagion between cells. In turn, this should save on administrative costs, as only one structure will be needed for multiple investment strategies.
The Law as it stands has served Guernsey and the industry well. It is hoped that the current trend for family offices to establish GLPs will continue and that the proposed amendments to the Law will prove useful in providing family offices with an alternative to the trust structure. The proposals willput Guernsey at the forefront of those jurisdictions offering limited partnership structures and will allow investors in other jurisdictions to migrate or convert their current structures into GLPs.
- 1. ‘Limited Partnership Review’, States of Guernsey Commerce and Employment Department, 2010