In this climate of low asset values and increasing taxes parents are looking at the most tax effective structuring of their family businesses and the most tax efficient methods of transferring assets from one generation to the next.

This article deals with family partnerships, an effective and tax efficient method of enabling parents to transfer assets to their children whilst effectively retaining control of those assets on behalf of the children for an indefinite period.

Increasing Capital Taxes

The rate of Capital Acquisitions Tax (CAT) was raised from 20% to 22% in November 2008 and in April 2009 to 25%. The Capital Gains Tax (CGT) rate was raised from 20% to 22% for disposals made from midnight on 14 October 2008 and was raised again in April 2009 to 25%.

Reduction of Capital Acquisitions Tax Free Thresholds

Group thresholds are annually indexed by reference to the Consumer Price Index. The thresholds were cut by 4.5% in 2010 in line with the fall in the Index. These cuts were the second in the previous nine months, the previous cuts having taken place in April 2009.

Commission on Taxation Report

The Commission of Taxation Report published on 7 September 2009 recommended reducing the reliefs available for Capital Taxes. These included:

• Reducing the rate of relief for business property relief and agricultural relief from 90% to 75%.
• Placing a cap of €3million on the amount of relief available for business property relief and agricultural relief.
• Placing a cap of €3million on the value that qualifies for Retirement Relief.

Family Partnerships

A family partnership is an estate planning vehicle which enables property to pass tax efficiently from one generation to the next. Assets are transferred at current low market values, thus minimising the exposure to Capital Taxes.

There is an ongoing liability to Income Tax and CGT by the Partnership. The children however, once over the age of eighteen, are able to use their tax credits and allowances resulting in a lower rate of Income Tax than if the assets were in the hands of their parents.

Control

The general wisdom is to transfer assets to the next generation when asset values are low. However the main stumbling block for parents handing over assets to children at an early age is the relinquishing of “control”.

The Family Partnership structure however:

• Enables a parent to gift assets to a child or children, to be held in a partnership structure, where control of the partnership rests with their parents in their role of managing partner.
• Creates a platform, in a controlled environment, whereby in the future the children can be encouraged to attend meetings with financial advisors as part of their education in financial matters.

Structure

The structure of the Family Partnership involves family members entering into a Partnership Agreement regulating the terms of the investment of the assets.

The structure enables a parent to gift assets to a child or children while at the same time retaining the control of the investment of those assets.

Each Partner contributes an amount of capital to the partnership which is invested as the partners from time to time determine. Each partner's contributed capital generally determines the partnership shares. This is typically 90% for the children and 10% for the parents. If any of the partners are minors then his/her parents (Trustees) normally enter into the Partnership Agreement on their behalf.

The Agreement sets out the initial capital of the partnership, the individual capital contribution of each partner and the percentage partnership share acquired by each partner.

Managing Partner

The Agreement appoints a Managing Partner. The partners delegate their powers to the Managing Partner by agreement between the parties. The Managing Partner generally decides on the investment strategy for the funds and the distribution policy of the partnership. It is common for one or both of the parents to be appointed Managing Partner in the first instance.

Administration

The Agreement also provides for the following:

• The registration of the assets of the Partnership in the name of the Managing Partner
• The establishment of a Partnership bank account
• The appointment of the Managing Partner as attorney of the other Partners
• regular meetings of the Partners should be held

Profits/Losses

The Agreement would also provide that the net profits/losses of the Partnership belong to the Partners in proportion to their individual Partnership shares. Commonly in particular where any of the Partners are minors, it will provide that the profits of the Partnership shall be accumulated.

Voting

Generally all decisions of the Partnership will be by a simple majority of votes cast at any Partnership meeting at which a quorum is present. While all Partners are entitled to vote at Partnership meetings, the Agreement can provide that voting rights are weighted in favour of one or both of the parents, so that the parent(s) can effectively control all decisions of the Partnership. Alternatively, some families may prefer that the Partners all have one vote but that the parents have a veto or must be included in the majority vote in order for it to be carried.

Dissolution

Any partner may retire from the Partnership by written notice. However, they are not normally entitled to their share unless the continuing Partners resolve to wind up the Partnership, or acquire their share.

On the death of any Partner, the continuing Partners may either acquire that deceased partners share or admit their heirs to the partnership provided they sign an agreement to the satisfaction of the continuing Partners.

If the continuing Partners resolve to purchase the Partnership share of a former Partner, the Agreement sets out the mechanism for valuation of that share (usually on a net asset basis).

In the event that the Partners resolve to wind up the Partnership, the Agreement also sets out the method of distribution of the capital and accrued profits of the Partnership.

Summary

A Family Partnership is an effective and tax efficient method of enabling parents to transfer assets to their children now with the benefit that the future growth accrues in their names while effectively controlling the future investment of those assets on behalf of the children for an indefinite period.

Linda Harney is a partner with Donegans, Solicitors
Tele: +353 (0) 21 5005333
Email: lharney@donegans.ie