The Town & Country Law Family Limited Liability Partnership
Key Points
- Retain Control of Assets
- Access to Ongoing Income
- Protect Assets for the Next Generation
- Reduce or eliminate Inheritance Tax
- Mitigate Capital Gains Tax
Family Partnership
In a nutshell, when and why do you want a Family Partnership?
If your estate – everything that you own – exceeds your Inheritance Tax nil-rate band, it is sensible to take steps to reduce the amount of tax that your estate will ultimately pay. By transferring assets (property, shares etc) to a Family Partnership, you can move those assets outside of your estate so that they are no longer included for Inheritance Tax purposes.
Inheritance Tax planning needs to be done as early as possible – at least 7 years before you die. The trouble is, of course, you don’t know when you’re going to die. Therefore, the time to plan is now! A Family Partnership allows you to, for example, transfer your rental properties outside of your estate, whilst keeping the rents as your own income.
All of this can be done without paying Capital Gains Tax now. The use of a Limited Liability Partnership, here called a Family Partnership, allows Capital Gains to be held over.
A Family Partnership is suitable for individuals who wish to transfer part of the value of their estate to the next generation in a tax efficient manner. But who do not yet wish to transfer ownership of their assets directly to their children.
It is particularly suitable for investment property (both commercial and residential). It can also be used to hold share portfolios and other investment assets.
A Family Partnership is a Limited Liability Partnership (LLP) and would be registered at Companies House – it is a corporate body for legal purposes and therefore offers a degree of limited liability protection for the partners, also called the members.
The partners would typically be yourselves and one or more of the next generation.
TAX IMPLICATIONS
- You will retain control and ownership over your assets during your lifetime
- No capital gains tax charges should arise
- No stamp duty land tax charges should arise
- Gifting the Debt Note to your beneficiaries will enable you to determine the long-term beneficiaries of your property portfolio.
PRACTICAL STEPS
- Firstly, you would set up a limited liability Partnership
- The Partners would be yourself and your children
- You would then transfer some of your investment assets to the partnership
- The transfer is done at market value
- In return the partnership would issue you a Debt Note with an equivalent value
- You could then gift some or all of the Debt Note to one or more of your beneficiaries, a discretionary trust or retain it for your personal benefit
FAQ’S
Who is a Family Partnership suitable for?
Any UK resident individuals with a life expectancy of over 7 years.
Is a Family Partnership suitable for everyone?
No, a Family Partnership is not suitable for everyone, there are a number of issues to consider and before taking the decision to proceed. We would need to consider your circumstances and requirements in detail. As part of the process we would provide you with a detailed letter advice setting out all of the tax implications involved with an LLP.
Do I need to be married to establish a Family Partnership?
No, a Family Partnership can be set up by a widower, a divorcee, or a single person in conjunction with their children.
What type of properties are suitable for a Family Partnership?
Any type of investment property is suitable to be transferred to a Family Partnership, including both residential and commercial rental property.
What other assets can be transferred to a Family Partnership?
A large range of assets can be transferred including share portfolios and cash.
What type of assets are not suitable for the planning?
Family homes and holiday homes are not suitable assets to be transferred to a family partnership as they are not business assets in addition ISAs cannot be transferred.
What is the minimum value of assets that can be transferred to a Family Partnership?
There is no specific minimum value of assets that should be transferred however generally assets with a value of at least £250,000 is advisable.
What is a Family Partnership?
It is a Limited Liability Partnership (LLP) carrying on a property/investment business, owned and controlled by you and registered at Companies House.
What are the key terms of a Debt Note?
The main terms are firstly this is generally not payable during your lifetime, and would only be paid, by the partnership, to the holders of the Debt Note on or after your death. In addition, there is an annual interest charge typically in the region of 0.25% to 0.5%.
Does the interest have to be paid?
Yes, the interest must be paid on an annual basis, it should not be rolled up or deferred. The interest is paid by the partnership to the holders of the Debt Note.
How long does it take to put in place?
Typically, 3 months.
Would a property valuation be required?
Yes, an individual valuation is needed.
Should I amend my Will after the family partnership has been established?
Yes, you should consult with your solicitor to ensure that your Will reflects your wishes and takes into account the Family Partnership. This is obviously something that Town & Country Law can do for you.
Who controls the partnership going forward?
The partnership will control the partnership, you will make all future decisions with regards to the assets in the partnership.
Can we sell the assets in the future and buy other assets?
Yes, the Debt Note is not secured on any assets and therefore it does not prevent the assets being sold at any time in the future.
What else can we do with a Debt Note?
Rather than gifting the Debt Note to your children you could potentially gift it to a discretionary family trust, your grandchildren or a charity although we would need to consider what was most suitable for your circumstances. Alternatively, you could retain it in your name for the time being.
Are there any Capital gains tax (CGT) charges?
Where a property investment business is being transferred to the LLP, no CGT charges should arise as the transfer of property to a partnership where you (i.e. you and your spouse for example) are the main partners is not a transfer of the beneficial interest for tax purposes. However, before proceeding you should take formal tax advice to confirm the position. This is something our accountant can do for you.
Are there any stamp duty land tax (SDLT) charges?
In most cases SDLT charges should not arise at the transfer of property to a limited liability partnership is subject to a specific statutory relief. However, before proceeding you should take formal tax advice to confirm the position.
What if I die within 7 years of gifting a Debt Note?
The initial gift of a Debt Note is a potentially exempt transfer (PET) for IHT purposes but it would become chargeable if you passed away within 7 years of the date of the gift. However, the amount of liability would be reduced by virtue of taper relief after 3 years.
What is the income tax position of a Family Partnership?
Any income received by the partnership will be taxed on the partners themselves according to how you decide to share the profits but broadly your income tax position should remain the same. The Partnership itself is not subject to tax.
What happens if the Family Partnership is no longer needed in the future?
You would need to take specific tax advice at the time, for example it might be advisable to wind up the partnership tax efficiently by means of a members voluntary Liquidation if appropriate. There are specific CGT provisions which apply on the winding up pf an LLP.
Some of the above points mention tax advice, can you recommend anyone?
Town & Country Law have our own internal accountant that can provide this for you.