Partnerships – ‘til death us do part
Prior to the pandemic, it was estimated that there were over 414,000 partnerships registered in the UK. For many, partnerships are a common way to avoid the administrative burdens and obligations often associated with a limited company. Whilst on the face of it, partnerships are a simple and effective way to run a business, it is important to reflect any agreements between each partner by way of a Partnership Agreement, particularly when it comes to the death of a partner.
Section 33(1) of the Partnership Act 1890 provides that, subject to any agreement between the partners, every partnership is dissolved upon the death of any partner. This means that unless the partnership agreement provides otherwise, where there are only two partners, the partnership comes to an end if one of them dies because a partnership, by definition, is a relationship that subsists between two or more persons carrying on business with a view to making a profit.
When considering the division of the partnership assets, section 42 of the Partnership Act 1890 provides that unless there is an agreement or a final settlement of the partnership accounts, the Estate of the deceased partner is entitled to an ongoing share of the partnership profits made since death. In determining what a deceased partner’s estate is financially entitled to in the event of his / her death, consideration is given to profit share, outstanding balances, and entitlement to assets and unused reserves. In the absence of any agreement however, the general provision is that all assets and the proceeds are distributed equally between the living partners and the estate of the deceased, irrespective of their actual contribution.
Further issues can arise when a partnership comprises of assets that are ‘loaned’ by a partner (and thus are not property of the partnership). If no record or agreement is in place concerning the ownership of assets, difficulty will undoubtedly follow when attempts are made to ascertain and value the extent of the deceased’s estate. HMRC take a robust view when it comes to valuing an Estate (particularly where tax implications apply) and so it is imperative that assets are properly distinguished between personal assets and assets of the partnership.
Those intending to work in a partnership are therefore urged to take time to enter into a properly considered written agreement between the partners to not only deal with the day-to-day dealings of the partnership, but to consider what happens with the partnership assets upon death. This will assist in providing a clear understanding between the parties which can be referred to should any dispute arise. Litigation can often be costly but can often be avoided where an agreement has been properly documented.
If you have any concerns with regards to your Estate and / or partnership and wish to discuss this further, please do not hesitate to contact a member of our Family Business team.
