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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Contracts for sale: Shareholdings and partnership interests

Partners and shareholder directors of companies may enter into agreements between themselves to the effect that

  • when one of them dies before retirement
  • the surviving partners or directors may purchase the partnership interest or shares of the one who has died.

The funds for the purchase may be provided by appropriate life assurance policies.

Only most exceptionally does such an agreement constitute a binding contract for sale within IHTA84/S113. For the agreement to come within IHTA84/S113 it has to provide

  • for the partnership interest, or shares, of the deceased partner, or shareholder, to pass to his or her personal representatives
  • that the personal representatives are required to sell the interest or shares to the surviving partners or shareholders
  • who are obliged to buy the partnership interest or shares.

These requirements are rarely satisfied. When they are, the agreement is called a ’buy and sell’ agreement and it prevents the interest or shares concerned qualifying for business relief.

Much more common are agreements under which

  • the deceased’s interest passes to the surviving partners, who are required to pay the personal representatives a particular price, or
  • the deceased’s interest falls into the estate, but with an option for the surviving partners to purchase it.

Agreements of these types do not constitute contracts for sale. So they do not prevent the interest from qualifying for business relief by reason of IHTA84/S113.

If you consider that business relief should be denied by reference to IHTA84/s113 because of the terms of a particular partnership agreement, refer the case to Technical.