Family Limited Partnerships: What They Are, How They Work, and HMRC's View

The Family Limited Partnership (FLP) is a well-established wealth planning vehicle in the United States, commonly used by HNW families to transfer assets to the next generation in a tax-efficient manner. It has attracted interest from internationally mobile UK-connected individuals — partly because it appears in the planning literature they encounter, and partly because some advisers have sought to apply FLP-like concepts within the UK legal framework.

Understanding the FLP requires clarity about three things: what it is in its original US context, how it differs from UK partnership structures, and what the relevant UK tax position is for UK residents or individuals with UK connections who attempt to use it. Getting this wrong can have serious tax and compliance consequences.

The US Family Limited Partnership: Structure and Purpose

In the United States, a Family Limited Partnership is a limited partnership formed under state law. The partnership holds assets — typically investment portfolios, real estate, or shares in family businesses. Family members hold partnership interests in two forms:

General Partner (GP) interest: the GP controls the management of the partnership, makes investment decisions, and often receives a management fee. The GP's economic interest is typically small (1–2% of the partnership), but the GP has full legal control. This interest is often held by the parents or by a trust for their benefit.

Limited Partner (LP) interests: the LP interests represent the economic ownership of the partnership's assets. These are held by family members (children, grandchildren, trusts for their benefit). LP interests carry no management rights — LP holders cannot force distributions, liquidate the partnership, or direct investments.

The LP holders are the "passive" investors in economic terms, with rights that are significantly restricted compared with owning the underlying assets directly.

Valuation Discounts: The Core Tax Strategy

The wealth transfer benefit of the FLP flows primarily from valuation discounts. Because LP interests carry no control rights and are not freely transferable (the partnership agreement typically restricts the transfer of LP interests to non-family members), tax authorities (and independent appraisers) recognise that a 10% LP interest in an FLP is worth less than 10% of the underlying net asset value. These "minority interest discounts" and "marketability discounts" can range from 15% to 45% in total.

The planning strategy is as follows: the parents fund the FLP with assets (say, $5 million of marketable securities). They then gift LP interests to children or trusts, using their annual gift tax exclusion and lifetime exemption. Because the LP interests are valued at a discount to NAV, the parents can gift more underlying economic value while using less of their lifetime exemption.

Example: £1,000,000 of LP interests, discounted to £650,000 for valuation purposes, uses only £650,000 of the lifetime exemption. The children receive 100% of whatever income and growth the $1,000,000 of underlying assets generate.

US courts and the IRS have engaged in extensive litigation over FLP arrangements. The IRS frequently challenges FLPs, arguing either that the discount claimed is excessive, or that the transfer of assets to the FLP lacked genuine business purpose (the "bona fide business" requirement). Court decisions have varied significantly depending on the facts.

UK Legal Framework: Not the Same as the US

It is important to clarify that the term "Family Limited Partnership" as used in US planning does not map directly to UK legal structures.

In the UK, a Limited Partnership is governed by the Limited Partnerships Act 1907. Like the US version, a UK LP has at least one general partner (with unlimited liability) and one or more limited partners (whose liability is limited to their investment). However, the UK LP operates in a very different regulatory, tax, and legal environment.

A General Partnership (under the Partnership Act 1890) is the default form — no registration is required, all partners are personally liable, and all partners have management rights. This is not typically what FLP planners intend.

A Limited Liability Partnership (LLP) under the Limited Liability Partnerships Act 2000 is the most commonly used commercial partnership structure in the UK. All partners have limited liability and membership rights. It is transparent for income tax and CGT (profits are taxed on the members, not the entity), but it is not equivalent to an FLP structure.

None of these UK structures directly replicate the US FLP's combination of control/minority structure with valuation discounts in the US gift-tax sense.

FLP vs Family Investment Company: The UK Alternative

For UK residents seeking similar intergenerational wealth transfer outcomes to those achieved by US FLPs, the Family Investment Company (FIC) is the most commonly used domestic structure.

A FIC is a private limited company incorporated in the UK. The shares are structured into multiple classes (ordinary shares, preference shares, growth shares, or alphabet shares) with different rights to income, capital growth, and voting. Parents typically retain voting control through one share class while gifting or subscribing economic interest shares to children at low initial value.

Tax characteristics of a FIC:

• Corporate income and gains are taxed at the corporation tax rate (19–25% depending on profits), rather than at the individual's marginal income tax rate (up to 45%)
• Dividends can be extracted by family members at the dividend tax rates (8.75%, 33.75%, or 39.35% depending on the recipient's marginal rate)
• Loans from shareholders to the FIC can be structured to extract capital without dividend tax, subject to anti-avoidance
• IHT: shares in a FIC do not qualify for Business Property Relief in most cases (because the FIC's assets are investments, not trading assets). The FIC is therefore typically an IHT-neutral structure — it does not worsen IHT but does not solve it

HMRC has been monitoring FIC use closely since approximately 2019, when it announced a research project into the structure. FICs are not in themselves a tax avoidance scheme — their tax treatment follows from standard company tax rules — but aggressive implementations (including arrangements designed to avoid income tax or IHT without genuine economic substance) have attracted scrutiny.

HMRC's View on FLPs Used for Gifting

Where UK residents have attempted to use partnership structures — either UK LPs or foreign FLPs — to achieve valuation discounts for UK tax purposes, HMRC has generally been resistant. The UK has anti-avoidance rules (under the Income Tax Act 2007 and TCGA 1992) that can recharacterise arrangements where the primary purpose is tax avoidance.

HMRC's Spotlight publications have addressed arrangements involving partnership interests where economic rights are transferred while voting or management rights are retained, particularly where valuation discounts are claimed for IHT or CGT purposes. Arrangements with the hallmarks of the US FLP strategy — in particular, claiming valuation discounts on transferred interests — are likely to attract HMRC challenge.

Individuals with US-based FLPs who move to the UK should seek specific advice on the UK tax treatment of distributions from the FLP, recognition of the partnership for UK income tax and CGT purposes (is it opaque or transparent?), and IHT on the underlying assets where those have a UK situs.

When Genuine Partnership Structures Are Appropriate for UK Families

There are legitimate UK uses for LP and LLP structures in family wealth planning — but these are typically in the context of genuine trading businesses, property portfolios, or professional practices, rather than passive investment portfolios. A family that operates a trading business through an LLP, or that manages a genuine commercial property portfolio through an LP, may have sound business reasons for the structure that go beyond tax.

The distinction between genuine commercial arrangements and tax-motivated structures is one that HMRC examines carefully, and the burden of demonstrating genuine business purpose rests with the taxpayer.

This article is for information only and does not constitute tax, legal, or financial advice. Anyone considering partnership-based wealth planning should seek specialist advice from both UK and (where relevant) US qualified advisers.

How Global Investments Can Help

Our advisory team has experience working with internationally mobile clients who hold or are considering partnership structures for family wealth planning — including clients with existing US FLPs who have relocated to the UK or who have UK tax connections. We work alongside specialist tax counsel to ensure that structures are both effective and compliant, and we help families navigate the differences between US and UK wealth planning frameworks.

Contact our team to discuss your family wealth planning objectives.