In-house collaboration – it pays a dividend

 In Gill's Blog

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Over many years in practice and as a consultant I have observed both good and poor collaboration in law firms. When collaboration between teams is adopted successfully, the clients benefit, and the firm capitalizes on the opportunities it brings for good quality work. Here are a few thoughts on how to spot opportunities for collaboration between private client practitioners and business practitioners.


Many business clients and farming clients operate their business as a partnership but how many of them have a partnership agreement? Even if they have, what should a private client practitioner be looking for in it?

  • If no agreement, the Partnership Act 1890 applies to dissolve the partnership on the death of a partner. Is this what the client wants? If not, encourage the client to use the firm’s business practitioners to prepare one. How much would your firm charge? Do you know to whom to refer the client?
  • If there is an agreement, what does it include for death and retirement? Is there a binding contract for sale in there (in old ones possibly) which would invalidate any prospect of Business Property Relief (BPR) for Inheritance Tax (IHT) on a partner’s share. Do business practitioners understand this, and would they point this out or do private client practitioners need to ask them to establish the position and explain why?
  • What does the agreement say about assets used by the partnership such as premises or plant and machinery? Is it clear what would be partnership property and what would be privately owned but used in the partnership? The difference is crucial to establishing which assets obtain 100% BPR and which only 50%. Also, if assets are partnership property their devolution is covered by the partnership agreement or the Partnership Act 1890 and cannot be passed under the client’s Will or intestacy.


Most private companies that firms will be acting for will be close companies, do private client practitioners know the implications of this? Do business practitioners know the IHT treatment of close company interests of participators? For example, who has control of the company? When you take into account the related property rules in s.161 IHTA 1984, do you come to the same conclusion? This can be significant again in relation to the ownership of land and buildings, plant & machinery outside of the company. To obtain 50% BPR the owner must have control of the company. Do the shareholdings need a review?

Is it likely that a member of a shareholder’s family is working for or going to work for the company in the future? Might they need to borrow from the company? If so, how will this influence who should be an executor and trustee of any Will or trust involving the shares in the company? Please bear in mind here the implications of s.455 Corporation Tax Act:

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  • For s.455 to apply the loan must be made to a participator in a close company or an associate of a participator. Family companies are often close companies – that is, one owned by five or fewer participators. But who are the participators here?
  • 455(1) says that a qualifying participator includes a trustee of a settlement and HMRC’s Company Tax Manual at CTM61525 says that where a trust holds shares in a close company, any loan by that company to the trust will be chargeable because the trustee or trustees are all participators or associates of a participator.
  • The trustees of the client’s Will trust will be participators as they own shares in the company. This means that any spouse/civil partner is a participator. An adult child seeking the loan is an ‘associate’ because s/he is a relative of a participator – s.448(1)(a).
  • Together this equates to a charge on the company equal to 32.5% of the amount of the loan for the accounting period in which the loan is made.
  • Just think, if the spouse was not a trustee but the client’s accountant had been appointed instead, then (assuming neither the accountant nor the solicitor owned shares in the company), then the corporation tax charge would not be levied.
  • Removing the child as beneficiary or transferring trusteeship both smack of ‘artificiality’ and could cause general anti-abuse problems. It’s worth thinking about this – two professional trustees may feel costly but if there is a likelihood of loans to participators the cost may be less than the tax bill.

Private companies will be incorporated with a Memorandum and Articles of Association, and some will have shareholders agreements. What are you looking for in these documents?

  • Shareholders agreements are private documents between the shareholders which have the status of a contract setting out terms between them. They often include who can benefit on a transmission of shares and on what basis they are to be valued on a death or retirement. Because they are not public documents you will not be able to obtain a copy from a company search but only from the shareholder. If there are restrictions on transmission of the shares this will affect the terms of any Will for the shareholder.
  • Like partnership agreements the wording is crucial to establishing whether there is a binding contract for sale on death, say, which would prevent the shareholder’s estate obtaining BPR for IHT. This should be reviewed, and the business practitioners may be able to negotiate a change to cross options.
  • If there is no shareholders agreement, transmission arrangements are usually contained in the Articles of Association. Check these public documents. If they are old (pre 1986) they should be reviewed by a business practitioner as they may need amendment for a number of practical reasons.
  • Sole director/sole shareholder companies are popular but check whether the Articles of Association permit the PRs to carry on the business on the death of the shareholder. If not, this creates all kinds of problems for business continuity on their death.

Business accounts

Casting a practiced eye over two years of business accounts is essential too to establish whether overall the business is a trading business – a vital requirement for 100% BPR for IHT. At present, as a rule of thumb, a business only needs to have 51% or more of its profits coming from trading activities, but this may change, when you think that you need 80% or more for Capital Gains Tax business reliefs.

Don’t forget that simply putting property on the balance sheet in the business accounts does not necessarily make it partnership property. Its status would need to be corroborated from agreements between the owners and the use of funds to acquire the assets and how they were used.

Lifetime transactions

Do business practitioners involve private client practitioners when re-organising a business or helping to sell it to enquire as to the consequences for IHT should the re-organisation change the shareholdings, or the sale reduce the relievable property in the client’s estate for IHT? It often pays to ask the question, when undertaking lifetime planning, what would be the tax consequences of the donor/seller dying tomorrow?

A salutary case on the latter point is Swain Mason v Mills & Reeve [2012] EWCA 498.

These are just some of the ways it pays for private client practitioners to collaborate with their business practitioners and vis-a-versa. I am sure you can think of many more. The key thing is to appreciate a firm is stronger when all its parts are working together for the good of the client.

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