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Taxation Readers’ Forum: Afterlife – life assurance policies and share purchases

26 November 2019

 

Writing for Taxation magazine, BKL tax consultant Terry Jordan answers a reader’s query on a life policy to buy a deceased partner’s shares.

‘My client entered into a life assurance policy in 1992 which would pay out, let’s say, £1m on his death. His two partners have also entered into similar policies.

The proceeds of my client’s policy will be held by the trustees (my client and his wife and daughter) for his two partners who are alive on the payment date.

The sum would then be used to buy my client’s one-third share of the partnership.

The life assurance policy also mentions that if he shall cease to carry on the business in partnership then his partners’ interest will cease and the policy will be held for himself absolutely.

In the partnership agreement an option has been granted to the surviving partners to buy the shares of the deceased partner at market value.

I am seeking guidance on the following:

  • If my client’s partnership share on a market valuation basis is for £500,000, for example, then do the trustees give only £500,000 to the remaining partners and keep £500,000 for the benefit of his estate?
  • Do the trustees give £1m to the remaining partners and they purchase his shares for £500,000 and the remainder is a windfall for them?
  • Do the trustees give £1m to the remaining partners and they purchase his shares for £1m?

I would also welcome advice in the scenario that my client is no longer in practice as a partner on the date of his death:

  • Are the policy proceeds of £1m considered to be part of his estate for inheritance tax purposes?
  • If so, is it then possible to hold the proceeds in trust for the benefit of his two adult children, so that they do not form part of his estate for inheritance tax purposes and they inform the insurance company now about it?

I hope readers are able to provide some advice here.’

Query 19,464  – Partnership Protector.

Terry Jordan’s reply

‘A commitment to purchase would preclude business property relief.

Partnership Protector’s client’s partners are prospectively entitled to the pay-out of £1m contingent upon them being in partnership with the client when he dies. On the face of it, there was no gratuitous intent when the arrangements were put in place in 1992 because reciprocal policies were taken out. These commercial arrangements are relatively common.

The devil as always will be in the precise detail of the wording of the arrangements, but the remaining partners appear to be entitled to the full £1m even if they are only obliged to pay £500,000 for the partnership share if that is the market value when the time comes – so the balance of £500,000 would represent a windfall for them.

We are told that if the client is no longer in partnership the £1m is held for him absolutely. On that basis, it would be an asset of his estate and potentially liable to inheritance tax. If possible as a matter of trust law, his contingent interest might be assigned now to his children. That would be a potentially exempt transfer and the current value would need careful calculation. In practical terms this might best be left until necessary if the client dies within seven years and is then no longer in partnership.

If the partnership interest would benefit from business property relief for inheritance tax purposes it should ideally be left to a discretionary trust in the client’s will rather than to his wife. Then the sale proceeds would be available to her without forming part of her inheritance tax estate. The partnership agreement includes an option so the pitfall of a binding contract for sale on death that would preclude business property relief has apparently been avoided.’

The article is also available on the Taxation website.

For more information about inheritance tax and estate planning, please get in touch with your usual BKL contact or use our enquiry form.