Following our article last year on the Government's proposals for a new form of English limited partnership vehicle, the private fund limited partnership (PFLP) has now been launched. This new vehicle is an attractive proposition for both fund managers and investors as it:
- offers the benefits of a traditional English limited partnership, such as flexibility and transparency for UK tax purposes
- provides investors with a broader range of permitted activities without jeopardising their limited liability status
- ensures that the capital contribution of an investor (out of which its commitment can be extrapolated) is no longer disclosed by Companies House.
We are already re-designating English limited partnerships as PFLPs and envisage that the vast majority of real estate funds structured as English limited partnerships will follow suit and designate (or re-designate) as PFLPs.
How to become a PFLP
To register as a PFLP, a limited partnership must be a "collective investment scheme" as defined in the Financial Services and Markets Act 2000. Importantly for these purposes, the exceptions to the definition are disregarded and so firms which would be treated as collective investment schemes but for one of the exceptions will be entitled to register as PFLPs. It is, in our view, unclear whether firms will be entitled to both rely on an exception for regulatory purposes and still benefit from becoming a PFLP.
Key advantages of the PFLP
The PFLP regime introduces a non-exhaustive list of activities that limited partners can undertake without being considered to be involved in management and thereby losing their limited liability status. The "white list" is broadly consistent with equivalent lists in other key fund jurisdictions, such as Jersey and the Cayman Islands.
Interestingly, a limited partner in a PFLP will be permitted to take part in a decision regarding changes in the managers of a fund. This level of involvement has historically been treated as integral to the management of a limited partnership and under the old rules would have resulted in a potential loss of limited liability.
In contrast with a standard limited partnership, limited partners in a PFLP are not required to make capital contributions. However, from a UK tax perspective, any limited partners in a PFLP which do not contribute any capital would, strictly speaking, fall outside the definition of "investors" for the purposes of the 2003 Memorandum of Understanding between the BVCA and HMRC on the tax treatment of carried interest (the MoU).
As the stated intention of the new legislation is not to change the UK tax treatment of PFLPs, it is hoped that HMRC will read the MoU so that “investor" will also include limited partners in a PFLP who only provide loans. Until the position is clarified, it is likely that limited partner commitments will continue to be split between loan and capital (although under this new regime, those capital contributions will no longer need to be disclosed). Incidentally, one of the features of Jersey limited partnerships when we advise on a fund structure is that details of limited partners are not publicly available.