Understanding Partnerships: What Happens When a Partner Passes Away?

When establishing a business with two or more owners in the UK, entrepreneurs often choose between forming an ordinary partnership or a limited liability partnership (LLP). Each type of partnership carries different implications, especially when it comes to the responsibilities and liabilities of the partners involved.

The Basics of Ordinary Partnerships and LLPs

Ordinary Partnerships: Defined under the Partnership Act 1890, this traditional form of partnership involves partners sharing risks, costs, responsibilities, and profits. Crucially, each partner faces joint liability for the debts and obligations of the partnership. This means that each partner could be responsible for the entire amount of any claims against the partnership, whether contractual or non-contractual.

Limited Liability Partnerships (LLP): LLPs combine the flexibility and tax status of ordinary partnerships with the benefits of limited liability. Each LLP member’s liability is restricted to the amount they have invested. LLPs must be registered with Companies House, unlike ordinary partnerships. This structure is often chosen for its tax advantages and ease of managing capital withdrawal compared to a limited company.

What Happens When a Partner Dies, Resigns, or Becomes Bankrupt?

Cessation and Continuation: The death, resignation, or bankruptcy of a partner can significantly impact the continuation of the business. In ordinary partnerships, such events typically lead to automatic dissolution unless the partnership agreement specifies otherwise. Most partnerships pre-emptively address this in their agreements to ensure the business can continue without interruption. Without such an agreement, the remaining partners may face legal battles or forced dissolution.

Limited Liability Partnerships: In contrast, LLPs do not automatically dissolve under these circumstances, offering a more stable business structure during such transitions.

Tax Implications and Asset Management

Tax on Profits and Capital: If no partnership agreement exists and a partner passes away, the deceased partner’s estate is entitled to either a share of the profits made since the partner’s death or interest at 5% per annum on the value of their share until it is paid out. Additionally, for capital allowances purposes, assets are considered disposed of and immediately reacquired at market value by the remaining partners, potentially allowing for balancing allowances if applicable.

Capital Gains and Inheritance Tax: When a partnership asset transfers to the remaining partners upon a partner’s death, it generally does so without consideration, maintaining the original base cost for the remaining partners. This transfer does not constitute a disposal for capital gains tax purposes, avoiding any capital gains tax uplift. For inheritance tax purposes, while the value of the deceased’s partnership share is part of their estate, business property relief typically applies, negating any inheritance tax charge.

The Importance of a Partnership Agreement

The scenarios highlighted underscore the critical importance of having a comprehensive partnership agreement in place. Such an agreement not only clarifies the process during transitional periods but also provides peace of mind and stability for all partners involved.

Seeking Expert Advice?

The complexities of partnership law and tax implications can be daunting. At Jon Davies Accountants, we specialise in guiding entrepreneurs through these challenges with clear, expert advice tailored to your unique situation. If you’re navigating the complexities of a partnership, why not reach out to us today? Our friendly team is here to ensure your business thrives through every transition.


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