The appeal of the FLP

Tuesday, 01 April 2014
Kevin O’Connell on the rise of the family limited partnership in the Crown Dependencies.

Stunned by the turmoil following the 2008 economic crisis and the realisation that things can change overnight, combined with the increasing probability of bankruptcy and divorce among the next generation, many family heads have strengthened their resolve to be more actively involved in the devolution of assets to the next generation. As a result, the Crown Dependencies have seen much more activity in the areas of reserved power trusts, private trust companies and private foundations.

Family limited partnerships

Family limited partnerships (FLPs), though not new, have in the past often been overlooked as an effective mechanism for family succession purposes. This is changing – and for good reason – as awareness of their benefits increases, and recent years have seen a marked increase in the use of FLPs by wealthy UK-based families, as an alternative structure to a trust.

In common with trusts, an FLP can be used to transfer beneficial ownership to the younger generation, while at the same time enabling the retention of a measure of control by the family head or ‘first generation’. The family head would typically contribute cash in consideration for limited partnership interests, which can then be gifted to the children according to the family head’s wishes. In the case of an FLP, management is undertaken by a general partner (GP), whose role is in many respects similar to that of a trustee. The GP is usually a limited liability company owned by the family head or a purpose trust, and will be responsible for managing the business or affairs of the FLP. The limited partners only have an economic interest and take no part in the management of the FLP and its assets. Consequently, their liability is limited to the capital or value of the property contributed. 

The traditional method for passing assets down through generations has of course been the trust. However, following the UK Finance Act 2006, the tax consequences of establishing a trust for those deemed UK-domiciled for UK inheritance tax (IHT) purposes has become somewhat unattractive, with the introduction of an immediate 20 per cent charge to IHT upon establishment and a subsequent 6 per cent IHT charge every ten years. The transfer of property or funds to an FLP does not trigger either of the aforementioned IHT charges. FLPs are particularly suited for capital gains tax planning on assets that qualify for business asset holdover relief.

A significant advantage over trusts is that FLPs offer flexibility, by virtue of management powers sitting with the GP, who controls how the FLP invests and the timing of any distribution. Moreover, the next generation can gradually become more involved in the activities of the FLP by being elected to join the board of the GP (although care may need to be taken on the jurisdiction and any implications on mind and management issues).


Confidentiality around family affairs is in most cases as important as the need for flexibility in the devolution of assets. While an English law partnership is subject to public disclosure requirements at Companies House, there is no need in either Jersey or the Isle of Man to file copies of the partnership agreement. As a consequence, details of the members or activity of the FLP are not publicly available. Unlike a UK FLP, a Jersey, Guernsey or Isle of Man FLP would not be treated as a collective investment scheme under the UK Financial Services and Markets Act 2000 and would therefore not require a discretionary manager and operator in the UK, nor be subject to the attributable regulatory requirements. This has the advantage of saving costs and making the administration relatively straightforward.

The business of the FLP must be carried on with a view to profit, but, provided there is active management of the assets by the GP and there is a real commercial element, FLPs can be used to hold a whole variety of assets, including property, trading businesses and quoted/unquoted investments.

Contract law applies to FLPs, which are operated in accordance with their specific terms. FLPs can be established for a specific term or may be unlimited in duration. Where there is concern about a future divorce, it is possible to outline a distribution policy at the outset to afford protection or to allow for divorcing members to be bought out in such a way that ensures assets are retained within the family for future generations.

Taking all of the above into consideration, while it is surprising that FLPs have not risen to prominence more rapidly, it is no surprise to finally see indications that the giant is slowly awakening. 

Author block
Kevin O’Connell

Kevin O’Connell is Group Commercial Director at First Names Group.

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