Partnership
How to set up an arrangement
The following flowchart gives details of what the next steps are to go ahead and actually set up the arrangement. It's also a useful checklist and can help ensure that you've met all the requirements.
Is there a partnership agreement in place?
If no partnership agreement in place, Partnership Act 1890 applies. Partnership is automatically dissolved on the death of a partner with deceased's partnership interest passing to their estate
Does the agreement enable the partners to do what they want with their interests in the event of a death or critical illness of a partner?
Agreement can be amended by a solicitor, when this has been done please continue.
Identify partners
Establish the value of the partnership. If not known, refer to the partnership accountant.
Possible solutions
Own life in business trust
Own life in flexible gift trust
Life of another
Each partner takes out an own life policy (usually written to retirement date) to be held under the business trust from the start. The sum assured should = value of life assured's partnership interest.
Choose appropriate option agreement for type of cover being taken out.
Tax treatment of premiums and proceeds
Premiums should be equalised to protect IHT effectiveness
Claim proceeds paid to trustees for benefit of other partners
Who will pay the premiums? Consider the tax treatment
No tax relief on premiums regardless of whether it is the partnership or the partners who pay. If the partnership pays this is treated as drawings. If the partners pay this is out of post taxed income.
Claim proceeds paid to trustees for benefit of other partners
No chargeable event usually on death or critical illness
Pre owned assets tax charge - potential liability if settlor a beneficiary
Trust subject to discretionary trust IHT regime
Each partner takes out an own life policy (usually written to retirement date) to be held under the flexible gift trust generally for the benefit of family members. The sum assured should = value of life assured's partnership interest.
Partners enter into an automatic accrual agreement
Tax treatment of premiums and proceeds
Premiums should be equalised to protect IHT effectiveness
Proceeds paid to trustees
No tax relief on premiums regardless of whether it is the partnership or the partners who pay. If the partnership pays this is treated as drawings. If the partners pay this is out of post taxed income.
No chargeable event usually on death or critical illness claim
Trust subject to discretionary trust IHT regime
Each partner takes out policy(ies) on the life/lives of other partner(s)
Choose appropriate option agreement. Usually written to retirement date of life/lives assured. The sum assured should = value of life assured's partnership interest. Premium equalisation not necessary.
Tax treatment of premiums and proceeds
No tax relief on premiums regardless of whether it is the partnership or the partners who pay. If the partnership pays this is treated as drawings. If the partners pay this is out of post taxed income.
Claim proceeds paid to owner of policy and forms part of their IHT estate. Proceeds drop out of policy owner's estate when used to buy deceased's partnership interest.