The use of Family Partnership Foundations as an alternative to Trusts

For decades, trust arrangements have been used within families as a vehicle to protect assets (or individuals) and to pass down family wealth. HMRC has become increasingly aggressive in its approach to trusts in its belief that these are used primarily for tax avoidance purposes. Family Limited Partnerships (FLPs) and foundations are becoming increasingly popular alternatives to trusts.

An FLP is a limited partnership vehicle which can be used to hold investments/assets for the family. It is comprised of a general partner, who is responsible for the management of the partnership (usually a parent) and limited partners (usually 2nd or 3rd generation) who are not allowed to be involved in the management of the partnership. For income tax and capital gains tax, FLPs are transparent; thus the tax liability is charged on the partners at their marginal rates which could be considerably lower than those within a trust.

For Inheritance Tax purposes a gift to a limited partner’s capital account or a gift of an FLP interest, is a potentially exempt transfer and as such no Inheritance Tax charge arises if the donor survives 7 years from the transfer. In addition, the assets held within the FLP will not be subject to Inheritance Tax charges (like some trusts) although the value of the partnership interest will be within the limited partner’s own estate.

A foundation is another structure which can be used as an alternative to the trust. Foundations are not a new concept but seem to have become more popular recently. Where a trust relies on a transfer of control over assets to the trustees, a foundation is a blend of a company and trust, which allows the founder to exert a significant degree of control over the foundation and its assets.

A foundation does not have shareholders or directors but instead has a management committee (who are appointed by the founder) which is responsible for running the foundation. It does not need to have beneficiaries but if the founder wants to have beneficiaries, he can choose who should benefit and specify the terms of benefit. In addition, the beneficiaries of a foundation do not have the same rights to information that a beneficiary of a trust has.

In respect of the tax position, it is not clear how HMRC will approach foundations. As they are a blend of a trust and a company, it is yet to be seen whether HMRC will tax them as a trust or a company. However, an individual seeking to set up a foundation will be doing so, not for tax planning purposes, but to assist with wealth protection, estate planning, succession and confidentiality. Depending on what you or your family are seeking to achieve, there are many different structures available to meet your objectives.