Pitfalls in faulty contracts – partnership and shareholder’s agreements

I have been writing elsewhere about the dangers of using templates and adapting borrowed contracts and agreements rather than paying for professionals to draw up new ones. It is time to be specific.

With regard to partnership business assets, there are generous, though one might say prudent, reliefs from inheritance tax which can amount to 100% of the value of the capital account and 50% of the share of buildings, land, and plant and machinery. That means that the heirs have the opportunity to receive up to the whole value of a deceased partner’s share of a business, depending on circumstances. However, partnership agreements understandably aim to preserve a business beyond the death of a partner, and therefore there is often a clause allowing the remaining partners to acquire the interest of the deceased member. That is a sensible arrangement, but a partnership agreement should give the living partners an option to purchase but not a requirement to do so. If they have an obligation that would be considered a debt due under contract in the eyes of HM Revenue & Customs, and business property relief would be lost, incurring a tax liability at 40% on what might be a very considerable amount.

A similar problem might arise if in a shareholders’ agreement, upon the death of a participator, shares which would otherwise have qualified for business property relief would not do so because the other members were obliged to acquire the shares of the deceased rather than having an option to do so.

Of course there is a lot more to this subject than I have mentioned. Every situation needs to be looked at separately and financial advisers may have solutions as to how help the still living members buy the interests of the deceased estate once we understand that they should not be obliged to do so.

As with all legal documents, with a partnership or shareholders agreement, get professional advice before diving in, and do not re-hash other people’s work because they might have got it wrong or the circumstances in which they were acting may have been different.

© Jon Stow 2009