It is said that there are only two things in life which are certain:- death and that England will never win the football world cup again. For UK expatriates liability to UK IHT is determined by an individual's domicile and by the situs of the asset rather than by his residency. All non UK residents who are UK domiciled are subject to UK IHT at a rate of 40% on the value of their worldwide estate, yes all of it, or more accurately everything which exceeds the nil rate band (currently £325,000 for each individual).

HMRC are reluctant to provide a ruling on domicile. It is still possible to get these rulings, despite commentary to the contrary, but it can take a long time and the outcome can be uncertain. Without a ruling it can be difficult for expats to know. Even if an expat is sure a new domicile of choice has been acquired that is not necessarily the end of the matter. Retaining a new domicile is difficult. It is quite possible that an UK domicile could be revived if the expat had to leave their new country because he gets a job or retires elsewhere.

Given the uncertainty, volatility and unpredictability of domicile, it is sensible for expats to put planning in place which will guarantee that their estate is not subject to the 40% tax.

All property held in a discretionary trust is outside the charge to UK IHT but getting it into trust is expensive while an UK domicile is retained. Transfers attract an entry charge of 20% and the trust fund will be subject to the anniversary charges (every 10 years) and the exit charges. No such problems arise with an FLP.

The FLP is a partnership formed between a general partner which is a company and up to 19 limited partners all of whom are family members. The general partner controls the FLP and manages its affairs and is generally owned and controlled by the head of the family

Step 1 is for the family patriarch to transfer valuable assets to the FLP in return for an interest in the FLP worth the same as the assets. There is no loss to his estate so no charge to lifetime IHT. This is just an asset swap.

Step 2 is that over time "shares" in the partnership are transferred to the limited partners. The general partner remains in control but divests value so reducing potential IHT if and when the owner of the general partner becomes not alive.

The gift of the partnership interests to the other family members will be a potentially exempt transfer ("a PET"). Provided the donor survives the transfer by 7 years no IHT will be due. The other limited partners can then gift their interest in the FLP to other limited partners at any time so children can pass to grandchildren and onwards through the generations. It is possible for the FLP to allocate different shares in income and capital to different partners so rights to income can be retained whilst capital value is given away. It is all rather splendid and ideal. The head of family can retain control and income rights while giving away capital value and losing IHT liability. Compare this to the alternative of just giving away assets outright 7 years before death with the complete loss of control this necessitates. Many would be reluctant to do this as they would not want to rely on their relatives to look after them financially but if they retain sufficient assets to ensure they are self sufficient they will almost certainly retain liability to IHT. Many wealthy individuals don't envisage needing the capital but do need the income and would like to retain control. An FLP achieves all this so is really jolly nice indeed. There is a growing consensus amongst international tax specialists, the writer included, that FLPs could prove one of the most effective alternative planning devices to trusts for British expats.

FLPs can be formed in many different jurisdictions. On the face of it there is no reason to go offshore and they can be formed in the UK but an UK FLP is problematic for two reasons. Firstly, UK Partnership law requires any partnership to be a proper business. An inactive asset holding/ property holding FLP, as many will be, would not normally be a business within that definition. There is no such requirement offshore.

Secondly a UK FLP falls within the definition of a "collective investment scheme" (within s.235 FSMA 2000). Thus the FLP is required to be regulated by the UK Financial Services Authority (FSA). If the FLP is established and operates overseas these regulations do not apply so FSA regulation is not required.

Of all the offshore jurisdictions I prefer Guernsey. Guernsey FLPs are recognised for UK tax purposes and Guernsey is a stable, respected and well regulated jurisdiction. Guernsey FLPs give the same advantages as an UK FLP without the added complications and expense.

FLPs are tax transparent. The partners are simply taxed in their country of residence on the FLP profits in proportion to the interest they hold in the FLP exactly as they are now. Subject to any local tax considerations there are generally no CGT or Income Tax advantages or disadvantages. The FLP is purely an IHT planning tool.

In summary, then, if an UK expat can establish or is certain that he/she is no longer domiciled in the UK, form a trust and bang all your stuff into it. If you are still UK domiciled or not sure, either give all your stuff away and get looked after by your donees or use an FLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.