Why family partnerships are worth considering

Passing value to your children during your lifetime can have tax advantages. But it can also mean giving up control over assets when your children may not be ready to manage this wealth. A family partnership can be an efficient way to pass value to the next generation while retaining control of how your wealth is managed.

How does a family partnership work?

A family partnership is a type of investment vehicle for members of a family. It allows parents to transfer assets they believe will accumulate greater value, while retaining control over the management of these assets. The partnership is generally structured so future growth accrues to the children.

The parents normally gift cash to the children on the condition that they invest it in the family partnership. To avoid immediate taxes, parents usually give an amount equal to the available tax-free threshold. The current parent-child threshold is €400,000.

It is also possible for the parent to lend funds to the partnership to increase its investment power. This way, the parent can effectively retain the capital while allowing the children to benefit from growth and investment returns. This substantially increases the potential benefits of the structure. To avoid a tax charge on the loan, however, it’s essential that both the family partnership and the loan are properly structured.

Who’s in control?

The managing partner (generally the parent) has the power to decide what investments the partnership makes. This can be done personally, or the parent can appoint an investment manager.

Each partner is entitled to a predetermined share of the partnership profits, as set out in the partnership deed. For tax purposes, profits are apportioned between the partners annually.

While each partner is legally entitled to their share of the profits from the outset, the managing partner (parent) can have exclusive control over the timing and amounts of the distributions paid to each partner (child).

What are the tax implications?

Capital acquisitions tax (CAT)

A gift from a parent to a child for the purpose of investing in the family partnership has CAT — in this case, ‘gift tax’ — consequences. The rate of gift tax is currently 33% on amounts above the tax-free threshold. Once the funds are in the partnership, no further gift tax should arise as the assets belong to the children. A child must file a CAT return when more than 80% of their Group A threshold has been used.

Income tax and capital gains tax (CGT)

For Irish tax purposes, Irish partnerships are treated as transparent entities. So the partners are assessed on their respective portions of the income and gains of the partnership. And they each have to register for tax — if they haven’t already — and file a tax return in years when the partnership realises income and gains. The partnership must also file annual tax returns. The total tax payable on the funds invested is no more than would apply if the parent had retained the funds — and is typically less than that.

What are the tax and commercial benefits?

Tax saving

A family partnership facilitates a capping of gift tax liabilities at the current value of the assets. In contrast, when a parent retains appreciating assets over a period of time, they significantly increase the CAT exposure on the ultimate transfer. A family partnership eliminates gift tax on future growth in value.

Control

The family partnership structure allows a parent to maintain control over the assets.

Flexibility

The timing and amount of cash payouts can be determined to suit the needs and circumstances of each partner (child).

Collective investment

Pooling the family’s investments typically allows for greater buying power and a wider choice of investments.

Balanced portfolio

Families can achieve an appropriate mix of assets to meet the needs of all its partners over time.

Three questions to ask yourself…

1. Is it the right time to start transferring wealth to the next generation?

Are your children at an age where you want them to gain exposure to managing investment assets or wealth? If so, a family partnership can be ideal for teaching your children about investing.

2. Do you have assets that are likely to increase significantly in value in the future?

If so, holding such investments or assets in a family partnership can have significant tax advantages. When structured properly, the growth of these assets can accrue to your children free of CAT.

3. Do you want to transfer value to your children, but keep control over the assets until your children are more mature?

A family partnership can be a practical way to achieve this goal. As the managing partner, you can retain control over the investment decisions around the partnership’s assets. You can pass these powers to your children when they have the knowledge and maturity to manage the assets themselves.

We are here to help you

A well-structured family partnership can provide real benefits, including significant tax savings and educational value. It’s important, however, to consider the tax, legal and commercial implications of setting up a family partnership. Contact us for expertise on striking the right balance when transferring wealth to the next generation.