UK: Business Life After Death

Last Updated: 23 August 2007
Article by Matt Haswell

With a partnership protection strategy, it is possible to reduce the impact of the loss of a key partner on a firm, says Matt Haswell.

If a business partner dies or becomes ill, failure to protect a firm and its partners could have dire consequences.

The death or critical illness of a business partner can cause considerable disruption to a firm. In addition to the emotional turmoil and potential knowledge gap triggered by a death, there are the financial implications to consider.

A partnership may have debts repayable upon the death or critical illness of a partner, including bank overdrafts, hire purchase agreements, bank loans and a partnerís capital account. Therefore the remaining partners will need to decide what happens to the deceasedís share of the business and resolve any problems relating to the deceasedís spouse or estate.

A suitably structured partnership protection strategy can ensure that the business remains in the control of the active partners while assisting the deceasedís dependants. Partnership protection allows business continuity by ensuring that a commercial purchase price is obtained for the deceased partnerís share of the business, payable to his/her spouse or estate, without undue delay.

What happens if a partner dies?

Most conventional situations of this type are dealt with under the Partnership Act 1890, whereby, on a partnerís death or retirement, the partnership must be dissolved unless the partnership agreement advises to the contrary.

The deceased partnerís share will pass to his/her estate, which could mean the partnership share going to the deceased partnerís spouse. This might present some serious problems. For example, the spouse could end up owning a share in a business that he/she does not want. In turn, the continuing partners will have a partner who cannot or does not want to participate in the business. Another likely scenario is that the spouse needs income and wants to sell the inherited share. The surviving partners could then face the possibility of a replacement partner who they did not choose. So, ideally, the remaining partners need to acquire the deceased partnerís share.

What should a partnership agreement include?

A partnership agreement should detail how the firmís profits are to be shared, the duties allocated to the various partners, and how to treat intangible assets and goodwill. Consideration should also be given to what would happen to a partnerís capital account and share in the business if he/she leaves or dies. If it is not already in place, a partnership agreement should be drafted under the direction of a solicitor.

It is important to assess the current provisions of the partnership agreement to understand the clauses that would operate in the event of the death of a partner, particularly regarding any restrictions on the disposal of shares in the business. There are various methods that could apply, namely automatic accrual, a buy and sell agreement or a double option agreement.

Automatic accrual

Under this type of arrangement the partners agree that in the event of one of them dying, his/her interest in the business will pass automatically to the remaining partners. This ensures that control of the business is retained by those people with the necessary skills and experience to continue to manage it as before.

However, it is important that the deceasedís heirs are financially compensated as, in many cases, the value of the late partnerís share may form a major part of his/her estate and the value of this inheritance could be lost to the heirs.

Buy and sell agreement

This is a written agreement stating that the deceasedís share of the business must be sold to the surviving partners who must purchase it. Although this is a relatively simple agreement, it should be borne in mind that business property relief available for inheritance tax purposes will be lost if such an agreement is used as it constitutes a binding agreement of sale.

Double option agreement

This is generally accepted as the most appropriate arrangement in normal circumstances. It is similar to a buy and sell agreement in that an agreement exists, but as an option rather than a legal obligation.

In the event of either the surviving partners or the heirs wishing to exercise their buy and sell option, the other party must comply. HM Revenue and Customs (HMRC) does not see a double option agreement as a binding contract for sale, so there is no loss of business property relief for inheritance tax purposes.

How can life assurance help?

Adequate cash resources must be available to allow remaining partners to purchase a deceased partnerís share in the business. The most effective way of doing this is for each partner to take out a life assurance policy on his/her own life and for the policy to be placed into a specially designed partnership trust arrangement that favours the remaining partners.

In the event of a partnerís death, the policy proceeds would be made immediately available to the trustís beneficiaries, free of any inheritance tax liability. The trust deed must be drafted to allow the monies to pass to the partners in proportion to their interest at the time of the death. This means that the trust will automatically adapt to take account of new or retiring partners and any changes in the partnership structure.

The types of policies normally used in connection with such agreements are level term assurance policies or whole of life policies. The level term assurance option provides low-cost life cover and is normally written to the partnerís expected retirement date. Naturally, it is important for such provisions to be reviewed frequently throughout the term of the policy to ensure that the cover represents a realistic valuation of the partnerís interest.

A whole of life policy provides cover throughout the partnerís life. On retirement the terms of the trust allow the policy to revert to the partner and may form part of the provision for the partnerís dependants.

Another aspect of this type of policy is the provision of benefits in the event of a partner suffering a critical illness, which could mean that the partner is unable to work or may no longer wish to participate in the running of the business. Such a policy would enable the remaining partners to buy that partner out and retain effective control of the business. It would also relieve the critically ill partner of some of the financial worry. This type of cover is available as an extra benefit to a whole of life policy or on a temporary basis as a policy in its own right.

What to watch for

Great care should be taken in selecting a suitable product and provider. When selecting the most suitable policy for partnership protection, partners should make sure that:

  • sums assured are indexed
  • cover increase and extension options are available
  • the premium basis is guaranteed or reviewable
  • there is availability of critical illness cover
  • competitive premiums are secured
  • taxation of policy proceeds is efficient
  • the term and level of cover required is sufficient.

All businesses have key people whose particular skills, knowledge, leadership or experience contribute to their continued financial success. This is why itís essential to have a well-defined partnership protection strategy in place to guard your companyís profitability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think youíve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.comís content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltdís services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) Ė meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with ďno disclosureĒ in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a userís hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friendís name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our usersí information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a userís personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that userís personal data provided to us. This can usually be done at the ďYour ProfileĒ page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.