Partnership cross option clause

In the event of the untimely death of one of the major partners, the surviving members probably won’t want the partnership interest to go to the deceased’s beneficiaries unless they are already involved in running the business. The partners can include a clause in a partnership agreement requiring that they are given the option to acquire a partner’s interest following their death. 

Partnership agreement

If there is already a partnership agreement, you can insert standard clauses which say that in the event of a partner dying their personal representatives are obliged to sell, and the other partners are obliged to buy, the deceased’s interest. The price will be fixed by a specified formula, presided over by the partnership’s auditor in case of a dispute and the funds for the purchase are often provided by appropriate life insurance policies.

HMRC’s prevailing view of this is that it represents a binding contract for the sale of the property (the partnership interest) in question at the time of the transferor’s death. This means that 100% business property relief from inheritance tax is not available on the devalue of the interest. This interpretation of the legislation has not yet been tested by the courts so you could challenge this view. However, it’s not worth incurring the costs because there’s a much simpler solution. Grant buy and sell options instead. Because an option for tax purposes doesn’t exist when it is granted but when it is exercised, it can’t be held to be an existing binding contract.

Make sure you have an up-to-date partnership agreement in place with a Partnership Cross Option Clause. This should: (1) grant the personal representatives of the deceased partner an “option to sell” the interest; and (2) grant the surviving partners an “option to buy” the interest. This option argument would also work for company shares.