Q&As

What would be the tax position on the death of a partner of a two-partner general partnership where the partnership agreement provides for the deceased partner's interest to vest in a third party and for a new partnership to be deemed to be formed automatically between the surviving partner and the third party?

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Produced in partnership with Graham Stott of gunnercooke LLP
Published on LexisPSL on 02/04/2020

The following Private Client Q&A produced in partnership with Graham Stott of gunnercooke LLP provides comprehensive and up to date legal information covering:

  • What would be the tax position on the death of a partner of a two-partner general partnership where the partnership agreement provides for the deceased partner's interest to vest in a third party and for a new partnership to be deemed to be formed automatically between the surviving partner and the third party?

What would be the tax position on the death of a partner of a two-partner general partnership where the partnership agreement provides for the deceased partner's interest to vest in a third party and for a new partnership to be deemed to be formed automatically between the surviving partner and the third party?

We have assumed that:

  1. the partnership is a general partnership formed under the Partnership Act 1890, and

  2. the third party to whom the deceased partner’s share vests is a relative of the deceased partner, so is a ‘connected person’ for the purposes of section 270 of the Inheritance Tax Act 1984 (IHTA 1984)

Under a general partnership, the extent of a partner’s share or interest can be summarised as comprising of three rights:

  1. their share of any surplus arising on the sale of the partnership property on dissolution

  2. their right to a share of the firm’s profits

  3. their right on dissolution to the working capital they have contributed viz-a-viz, the balance of their capital account

HMRC generally treats a partner’s share in a general partnership as a single ‘chose in action’ rather than as a tripartite ‘chose in action’ and partners as ‘connected persons’ from the moment that the partnership is formed for inheritance tax (IHT) purposes and for the purposes of IHTA 1984, s 10(1) which provides:

‘A disposition is not a transfer of

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