Partnership Cover

Partnership Cover

Why would you need it?

The purpose of partnership cover is to ensure that the surviving partner's have the funds to purchase the deceased share of retained profits and partnership capital. The arrangement is personal, and the policy is owned by the partners, who must pay the premiums. 

What can the proceeds be used for?

The partners may be legally bound, either under their own partnership  agreement, or under the Partnership Act 1980, to pay an immediate capital sum to the deceased partner's estate and the proceeds of the policy could be used to:

1. Pay the deceased partner's share of undrawn profits for the year in which he/she died.

2. Pay the deceased partner's share of any partnership fixed assets, such as buildings. See Letter of Request  for more information. 

3. Pay the balance of his/her capital or loan account. 

4. Pay a payment in respect of the deceased partner's share of partnership goodwill. 

How much cover is needed?

The cover should match the estimated current value of the life assured's share in the partnership.

What are the requirements to set up a policy?

1. Amend the existing partnership agreement to provide for the purchase and sale of a deceased partners share of the business on death or

2. Create a Buy/Sell agreement which states that if any of them should die, the surviving partner's can purchase the other’s holding from his/her estate at a fair open market price. If there is a requirement for Specified Illness then a Single Option Agreement is required.  This means that the partner who suffers the serious illness is given the option to exercise the option rather than the other directors.

3. Set up the policies either as "Own life in Trust"  or " Life of Another"
(a)  "Own life in Trust" On this basis, each of the partners takes out a life policy on his/her own life under trust for a sum assured equal to the value of his/her share of the business. The trust form can be found here.
(b) "Life of Another" On this plan basis, each partner takes out a life insurance policy on the life of each of the other partners for a specified sum assured. It is intended that this will enable the purchase of the appropriate portion of the deceased’s shareholding in the event of any of their deaths - Application form required 

4. Financial underwriting questionnaire to be sent in with the application form if the sum assured is above 1.5m. This will also be required if the cumulative figure of all policies that the company is submitting is over 1.5m.

5. Check underwriting requirements. 

6. Flow chart steps shows what is required.

Who pays the premium?

The premiums can be paid:

1. The individual partner out of after-tax income 

or

2. The partnership on behalf of the individual and treated as drawings from the partnership account attributable to the individual. 

Are the premiums tax deductible?

No. There is no tax relief on premiums paid.

The tax treatment varies depending on how they are set up:

Life of another

Proceeds payable on death are not liable to Capital Gains Tax under current legislation. Where the plan is arranged on a “life of another” basis, there is no inheritance tax liability for the surviving partner, provided they paid the premium for the benefit they receive.

Own life in Trust

Proceeds payable on death or disablement are not liable to Capital Gains Tax. Revenue has clarified that these proceeds are exempt from inheritance tax for surviving partners if used to purchase the deceased partner’s share of the business

Taxation on sale of the share by the personal representatives

If the deceased partner’s share in the business is sold, Capital Gains Tax may apply on any increase in value between the date of death and the date of sale. This liability is usually small. In addition, the amount received for the deceased partner’s share could give rise to an inheritance tax liability for the deceased partner’s estate or family.