Why use a family partnership?

A partnership is a useful structure which allows assets to be controlled by one generation of a family, while allowing value to accrue for the next.

Before establishing a family partnership structure, we advise that you start by identifying the amount of assets that you will need for your lifetime. We can guide you in quantifying the appropriate figure, ensuring it accounts for all current and expected future expenditure, along with a significant buffer. You should only consider making provision for the next generation once you have that level of comfort.

From a tax perspective, the rationale is that partnership assets grow in the names of the children, mitigating future Capital Acquisitions Tax (CAT). 
 

How is a family partnership structured? 

The underlying partnership assets are managed by the parents in their formal role as the controlling partner.

In practical terms, this means that the parents decide how the partnership assets are invested, and more critically, how and when the assets pass to the other partners (typically children).

The other partners do not participate in the management of the partnership, but benefit from the appreciation of the underlying assets.

The benefits of setting up a family partnership include:

• Parents can gift assets to a child/children to be held in a partnership structure where the parent controls the underyling assets i.e. the child/children cannot access them.
• It creates a platform in a controlled environment where the children are encouraged to participate in meetings with financial advisers, keeping them informed of financial matters.
• As the structure is transparent for tax purposes, future growth in the underlying assets is not subject to further CAT for the children.  

Types of family partnerships 

There are two types of family partnerships for these purposes, a limited and a general partnership. There are some technical differences between the structures, but they broadly operate in the same way and offer the same tax benefits.

They both involve family members entering into an agreement to regulate how the partnership invests and holds assets.

A limited partnership is the preferred investment structure if there are borrowings, as the partners (apart from the controlling or general partner) have limited liability. 

When a partnership structure is used for investment purposes and there are no borrowings, there is typically little concern for partners having personal liability.

If proceeding with this approach, it is necessary to consider whether an individual partnership should be set up for each of your children or whether they should both be partners in the same partnership.

How do funds transfer into the structure?  

Once a partnership is established, the three principal ways to transfer assets into it are by:

• Gifting cash
• Lending cash
• Transferring investment assets using the CGT/CAT offset  

The optimum solution is often a combination of some or all of the above.  

Gifting to children up to their CAT group A threshold (which has now increased to €400,000) can be used to finance their share in the partnership.

An alternative to gifting funds is lending i.e. lending funds to children to fund their interest in the capital of the partnership. The creation of a genuine loan does not trigger CAT and formal loan documentation would need to be executed.

The loan however would need to be repaid. If the loan is forgiven, that would be a gift or inheritance for CAT purposes. It is important to note that if interest is not charged on the loan, the amount of interest forgone can be treated as a gift, and there are specific rules for valuing the interest in these circumstances. Putting a loan in place may also lead to filing obligations with Revenue.

When assets other than Euro cash are transferred to children during the parent’s lifetime, this may trigger CGT for the parent as well as CAT for the children. In addition, stamp duty may need to be considered. The CAT code includes a provision that allows beneficiaries to receive a credit for any CGT paid, which can be applied against their CAT liability, where both taxes arise from the same event. This typically only applies when the child’s CAT threshold has been largely utilised. This can be an efficient way of transferring investment assets into a partnership.

Setting up a partnership and ongoing obligations

Setting up a partnership will require a bank account to be established and a number of filings to be made.  

• It will be necessary to register the name of the partnership in the Companies Registration Office (CRO).
• If a limited partnership is established, it will be necessary to file details with the CRO and in some circumstances accounts may need to filed on an annual basis.
• The partnership will need to be registered with Revenue, obtain a tax number and file tax returns.
• The partners will also typically need to file tax returns. However, this may not be necessary if the partnership solely invests in funds where tax is deducted at source.
• If there are loans in place, there are new filing obligations with the Revenue which will need to be addressed. 
• If there are children under 18 who are partners, it is necessary for parents to sign some additional paperwork to act as nominees for their children's partnership interests.

In addition, it is necessary to use a specialist legal firm to put the partnership structure in place.      

Why family partnerships work    

Whilst there are costs involved in establishing a family partnership and ongoing obligations, we find that these structures can work very successfully. They facilitate the tax-efficient transition of wealth to the next generation during the parents' lifetime and can also be used by grandparents who want to make provisions for grandchildren.

Taking a proactive approach to succession planning and having a plan in place for the transfer of assets to family members is extremely important. Using family partnerships can be the starting point of a broader estate plan.

By working with clients through the financial planning process, we can determine if this type of structure is suitable for you and your family. And if so, we can help you with the important decisions such as how the partnership structure can be funded and the underlying assets invested.

If you’re an existing Davy client, please contact your adviser to find out more. If you’re new to Davy, why not book a consultation today?