25 February 2016

Sole traders and partnership succession

In family businesses which are run as partnerships or even as sole traders, family members often expect to continue running the business when the partner or sole trader dies, or believe that they will be entitled to the value of the deceased family member’s share.

So it comes as a shock when, under English and Welsh law, if there is no partnership agreement, the partnership is automatically brought to an end on the death of a partner. This often means that the partnership bank accounts are frozen upon notification of one partner’s death. This can cause cash flow problems and interim difficulties with receiving and paying partnership bills.

Sole traders’ business accounts are also frequently a source of distress for those left behind, as these will also be frozen as soon as the death is registered. The executors will not be able to operate the bank accounts until probate has been granted – this can take some time, particularly where a full inheritance tax form has to be submitted to HMRC and clearance given.

In the meantime, employers and suppliers need to be paid and, in the case of a farming business, animals fed.

It is possible to apply for an emergency grant of probate to enable the business to continue until the main grant of probate has been obtained. This involves submitting an affidavit to the Probate Registry as to why the grant is urgent and applying for clearance from HMRC.

Usually, a professional executor is chosen to act under an emergency grant. Once issued, the emergency grant can be registered with the bank and the business account transferred into the professional executor’s name, which will help to sustain the business until the main grant issued.

Where there is a written partnership agreement, consideration should be given, amongst other things, as to: who will succeed the current partners; how the deceased’s partnership interest will be valued; the availability of inheritance tax business property relief on death and whether the partnership accounts will be made available to the executors.

All of these issues should be considered when wills are being reviewed or created, especially when business structures have changed or have not been taken into account previously.

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About the Author
Dawn Oliver, Partner, Head of Wills, Trusts and Estates
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