Family partnerships have become a tax efficient estate planning structure that allows parents to gift assets to their children while still retaining control, through their function as managing partner, of the investment of those assets. A family partnership is a term used to describe a partnership between members of a family, often parents and their children.
The transfer of assets to the partnership is subject to tax for both the parents (Capital Gains Tax – CGT) and the children (Capital Acquisitions Tax – CAT). Stamp Duty also needs to be considered. However, the tax may be minimised, where assets of current low value, but with an expectation that they will grow over time, are transferred.
The family partnership structure enables a structure where parents retain a degree of control over any investments or trading assets they wish to share with their children during their life-time, but where the value of the partnership is dispersed between all partners in the partnership. However, partners in a family partnership can also comprise of corporate entities rather than purely individuals.
By transferring assets into the partnership, any future gains on those assets can be shared among family members. The ability to strategically distribute gains can lead to substantial tax advantages when considering the long-term growth of family assets. Family partnerships serve as an effective vehicle for succession planning, ensuring a smooth transition of assets and wealth to the next generation while potentially minimizing inheritance tax liabilities.
The partners are liable to tax on income/capital gains arising from the partnership. One of the most notable tax advantages offered in this structure is the ability to distribute income among family members in a tax-efficient manner. By strategically structuring the partnership, income can be allocated to family members who fall into lower tax brackets, effectively reducing the overall tax liability.
A partnership agreement should be prepared setting out the terms of the partnership, typically each partner’s contributed capital determines their partnership share. This is typically 90% for the children and 10% for the parents. The Agreement appoints a managing partner. By agreement between the partners, the managing partner decides on the investment strategy for the funds and the distribution policy of the partnership. By having one or both parents as managing partner, they retain control of the assets. The partnership must register for taxes, file its tax returns and depending on the type of partnership established file accounts on public record with the Companies Registration Office (CRO).
The partnership can be either a limited or general partnership. In a Limited Partnership, the liability for all bar at least one partner is limited to the amount they have contributed. Therefore, their liability to debts is capped. A General Partnership is less administratively burdensome but all partners are liable for the debts of the partnership without limit.
Family partnerships are a useful vehicle for preserving wealth, optimising taxes, and ensuring a smooth transition of assets within a family unit. It is important to get the tax planning right and avoid the pitfalls.
DISCLAIMER This article does not constitute professional accounting, tax, legal or any other professional advice. No liability is accepted by ST Tax for any action taken or not taken in reliance on the information set out in this presentation. Professional accounting, tax, legal and / or any other relevant professional advice should be obtained before taking or refraining from any action as a result of the contents of this article.