Running a business in partnership has its benefits, but it also comes with legal and tax implications—especially if one of the partners passes away.
If you’re in a partnership or thinking of setting one up, it’s important to understand what happens to the business and your tax position when a partner dies. Whether you have a formal agreement in place or not can make a big difference.
Here’s what you need to know about the tax implications and practical steps that follow the death of a partner.
What Is a Partnership in Legal Terms?
A partnership is one of the few business structures that can be formed without a written agreement. Under UK law, it’s created automatically when two or more people carry on a business together with a view to making a profit.
And those people don’t have to be individuals. A partnership can include a mix of individuals, companies, and even trusts.
Unless the partners have agreed otherwise—either verbally or in writing—the rules of the Partnership Act 1890 apply. This means:
- Profits and losses are shared equally
- Partners are jointly liable for debts and damages
- The partnership will automatically dissolve on the death or bankruptcy of any partner unless an agreement says otherwise
What Happens When a Partner Dies Without an Agreement?
If there’s no formal partnership agreement in place, the default position is that the partnership ends on the date of the partner’s death.
At this point:
- The partnership’s assets may need to be sold
- Any debts are paid off
- The remaining funds are distributed between the surviving partners and the deceased partner’s estate
From a tax perspective, the deceased partner’s share in the business becomes part of their estate. This could trigger an inheritance tax (IHT) liability, although Business Property Relief may apply and reduce or eliminate the charge.
The estate is also entitled to a share of the profits made since the partner’s death, or interest at 5% per year on their share of the partnership—whichever the personal representatives choose.
For income tax, the partner’s estate is taxed just as if a sole trader had stopped trading. That means profits from the end of the last basis period up to the date of death are taxable.
The Role of a Partnership Agreement
A formal partnership agreement changes the picture significantly.
In most cases, it will include provisions to allow the partnership to continue after the death of a partner. It can also set out what happens to the deceased’s share, including:
- Whether their heirs can sell the share to someone else
- Whether the remaining partners can (or must) buy the share
- How to value the partnership interest
- Payment terms and procedures
- How and when to remove the deceased partner’s name from contracts and marketing materials
Having these details agreed in advance helps avoid disputes and ensures the surviving partners can keep the business running smoothly.
What About Limited Liability Partnerships (LLPs)?
LLPs work in a similar way for tax purposes but offer the added protection of limited liability. That means each partner is only responsible for debts up to the amount they’ve invested.
The same principles apply when a partner dies, but the personal liability exposure is lower, which can be reassuring for both partners and their families.
Why This Matters
The death of a partner is a difficult time—but without the right agreement in place, it can also be disruptive, costly, and full of uncertainty for the business.
If you’re in a partnership, it’s crucial to have an agreement that covers what happens if a partner passes away. It protects the business, supports the surviving partners, and gives clarity to the deceased partner’s estate.
Do You Have the Right Protection in Place?
At Jon Davies Accountants, we work with partnerships of all sizes to make sure they’re set up for long-term stability. If you’re unsure whether your partnership agreement covers everything it should—or if you need help understanding the tax impact of a partner’s death—we’re here to help.
Get in touch today to safeguard your partnership and plan for the unexpected.
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.
Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk