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Background: Limited Partnership funds

What is a limited partnership fund and how are they structured?

A limited partnership fund (LP Fund) is a collective investment vehicle that is established as a limited partnership under the Limited Partnerships Act 1907 (LPA), or under similar provisions in other jurisdictions. An LP Fund will generally have a fixed term.

»Ê¹ÚÌåÓýapp investors in the fund are limited partners. »Ê¹ÚÌåÓýapp general partner is an entity controlled by an investment management business. An LP fund consists of a general partner, who is liable for all debts and obligations of the firm, and one or more limited partners (as per section 4(2) LPA). As the general partner will take on unlimited liability for the partnership, the investment management business or ‘fund houseâ€� typically limits its exposure to this unlimited liability by establishing a limited liability entity, such as a company to act as general partner (a GP Co). A new GP Co is normally established for each LP Fund.

»Ê¹ÚÌåÓýapp general partner has the responsibility of managing the fund’s affairs.  This will be set out in the limited partnership agreement between the partners.  »Ê¹ÚÌåÓýapp general partner will enter into an agreement with the ‘fund houseâ€� to provide investment management services to the fund. »Ê¹ÚÌåÓýapp general partner typically agrees to do this by paying the ‘fund houseâ€� using its share of the LP Fund’s profits.

During the early stages of a fund’s life there will be little or no profit to distribute to members of the LP Fund; profits will be realised in later years when assets are sold. In this early period, the investors or the fund vehicle will typically advance the general partner money from the fund’s capital reserves so that the general partner can pay the investment management fees as per its contract with the fund house. This advance is usually known an ‘advance profit share�.

»Ê¹ÚÌåÓýapp limited partnership agreement will usually recognise that the general partner has been advanced monies to settle the management fee and guarantee that the general partner gets allocated a share of any profits before limited partners. This is known as a ‘guaranteed profit shareâ€� or ‘priority profit shareâ€� and it typically matches the accumulated ‘advance profit shareâ€�.

What is GP-LP and GP-LLP planning?

»Ê¹ÚÌåÓýapp effects of the disguised investment management fees (DIMF) rules are not limited to any particular avoidance structure or category of asset manager. However, the main types of planning that they were introduced to resolve is sometimes described as general partner-limited partner (GP-LP) and general partner-limited liability partner (GP-LLP) planning.

In both of these cases, the investments of the fund are held in a limited partnership fund (LP Fund). In GP-LP planning, the general partner of this LP Fund is itself a limited partnership (GP-LP). »Ê¹ÚÌåÓýapp GP-LP then has its own limited partners and a general partner that is a company (GP Co).

This means that instead of the management fee flowing through from the LP Fund to the GP Co directly, the advance profit share goes to a GP-LP.

This presents the opportunity for diversion of management fees to the members of the GP-LP before the management fees are recognised by the ‘fund houseâ€� which may be an LLP or company. »Ê¹ÚÌåÓýappse members may be individuals, trusts, partnerships or companies directly or indirectly controlled by individuals who have provided the investment management services. »Ê¹ÚÌåÓýapp diversion of management fees directly or indirectly will be for the benefit of those who have provided investment management services.

»Ê¹ÚÌåÓýapp DIMF rules act to ensure that fees in these circumstances are correctly charged to income tax.

Example of GP LP and GP LLP planning

GP LLP planning is broadly similar, with a limited liability partnership taking the place of the limited partnership.