- October 15, 2017
- Posted by: Stephen Coleclough
- Category: Tax
Ensuring a business is able to continue as smoothly as possible following the death of a shareholder or partner requires careful thought.
In many cases, the deceased’s family will have no interest in becoming involved in the business and the natural successors are fellow shareholders or partners.
Further, the Partnership Act 1890 s 33(1) provides for a partner’s death to dissolve the partnership unless there are provisions to the contrary in the partnership agreement.
The sensible commercial solution is to ensure that there is a written agreement in place securing that the deceased’s share passes to the continuing owners.
The problem here is s 113 which states that property subject to a binding contract for sale at the time of a transfer of value is not relevant business property and does not therefore qualify for Business Property Relief (BPR) under s 105.
Many pre-emption rights included in (for example) a company’s articles are may be effective in securing the right commercial result, but could be fatal to a BPR claim.
Statement of Practice 12/80 sets out HMRC’s view that a right in a company’s articles to buy out the shares of a deceased shareholder means that the deceased has lost beneficial ownership of the shares, and therefore BPR is not available.
The same analysis applies to rights under a partnership agreement.
For this reason, it is standard planning to arrange for cross options to be granted, under which the surviving shareholders or partners have the option to buy and the deceased shareholder or partner’s personal representatives have the option to sell within a stated period after the individual’s death.
Although an option is a contract for sale, HMRC have confirmed their view that the contract is conditional upon exercise by the option holder, and until that happens, the deceased shareholder has retained ownership of the shares (Spiro v Glencrown Properties Ltd [1991] 1 All ER 680).
Given the potential amounts at stake, it is worth a thorough check of the articles or partnership agreement to ensure that the arrangement has been properly structured.
If anyone has fallen foul of this evil little trap then let’s talk, there is an arguable case waiting to be argued.