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LLP member deceased

LLP member deceased

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Profit allocation to estate:

Given it is 29 January, I'm not expecting any detailed answers but I have an issue concerning the allocation of trading profits to the estate in administration of a deceased member. We're talking about accounts for a period starting after the member died - i.e. after he ceased to be a member by virtue of his death - and neither the personal representatives or his heirs have been appointed as members since his death. I'm struggling to see how trading profits can be allocated to the personal representatives (in the accounts and on the partnership tax return) as members of the LLP when they are not members. The person preparing the accounts seems to think it's fine. Given that the remaining members are liable at 40% or more and the estate is liable at 20%,and the profits allocated are almost £200k, the tax difference isn't small.

Any brief comments on whether this is, or isn't, possible would be gratefully received.

Thanks

Cathy

Replies (14)

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By johngroganjga
29th Jan 2016 14:28

Yes it must be wrong but I am sure that the beneficiaries of the estate will be delighted.

No doubt the executor has provided the LLP with details of the bank account to transfer the distribution into.

Has the LLP been asked whether the LLP agreement specifies an end date to the distribution of profits to a deceased member's estate, or does it continue for all eternity? 

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By cathygrimmer
29th Jan 2016 15:04

@johngroganjga

Thanks, John - I'm glad you think it must be wrong too and I'm not going mad!

The LLP agreement doesn't (as far as I can see) specify a start to getting profits after death - let alone an end. But the LLP is hanging on to the deceased's capital share (and we're now a few years after his death) so some sort of return on that seems reasonable. Whether there is a legal entitlement is another matter - but my problem is that I just can't see how it can be returned as a partnership share on the tax return.

Cathy

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Portia profile image
By Portia Nina Levin
29th Jan 2016 15:40

I assume that the LLP has not claimed AIA, if they are treating the personal representatives (who are not an individual) as a member?

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By cathygrimmer
29th Jan 2016 15:51

No idea!

No idea, Portia - I'm not privy to the LLP's tax return as my involvement is only with the returns of the deceased and the estate in administration. Though the accounts don't say the PR's are a member - they just want to tax then as if they were! And seem unable to understand why I would have a problem with that. 

Cathy

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By johngroganjga
29th Jan 2016 20:53

I think you should congratulate your deceased client's beneficiaries' on their good fortune, and not rock the boat, which for obvious reasons they would not thank you for.

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Hallerud at Easter
By DJKL
29th Jan 2016 22:10

Given the level of profits and assuming the partners are not all "close" family (and even then), someone, somewhere, ought to have thought about a partnership agreement; looks like one where the solicitors will do very well dealing with this, that is if they were not the party who advised on the setup of the partnership in the first place and should have considered this outcome.

Edited- since initial post have had a read of the 2000 Act, the provisions re the 1890 General Partnership Act only appear to bite if regulations passed to make them bite, so all as clear as mud.

 

Section 7:

7Ex-members.

(1)This section applies where a member of a limited liability partnership has either ceased to be a member or—

(a)has died,

(b)has become bankrupt or had his estate sequestrated or has been wound up,

(c)has granted a trust deed for the benefit of his creditors, or

(d)has assigned the whole or any part of his share in the limited liability partnership (absolutely or by way of charge or security).

(2)In such an event the former member or—

(a)his personal representative,

(b)his trustee in bankruptcy or permanent or interim trustee (within the meaning of the M1Bankruptcy (Scotland) Act 1985) or liquidator,

(c)his trustee under the trust deed for the benefit of his creditors, or

(d)his assignee,

may not interfere in the management or administration of any business or affairs of the limited liability partnership.

 

(3)But subsection (2) does not affect any right to receive an amount from the limited liability partnership in that event.

 

 

This part is silent except the right to receive an amount from the LLP, would want the opinion of a solicitor here before continuing as to what "amount" means here, in what form is this "amount" received?

 

 

 

 

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By cathygrimmer
30th Jan 2016 16:27

@DJKL & johngroganjga

@ DJKL

I've read the relevant legislation re LLPs but, as you say, it just says the inability to interfere with management etc. doesn't affect the right to receive 'an amount' - but that doesn't mean it gives them a right to receive something! Indeed, they may have a right to something (that's one for the lawyers to sort out) - but I don't think the amount they receive is taxable as a parternship share of profits.

@johngroganjga

That's not my call, John. I have been asked to advise the executors' accountants what to put on the tax return. I am obliged to tell them what I think the position is - even if that is to the detriment of the executors. I can't say 'it's wrong but best to keep your mouth shut and carry on treating it incorrectly'!

If HMRC pick this up (and they have accounts etc showing the members and a partnership tax return showing different members so they might) and ask the actual members for all the tax and NIC and they then try to recover the money from the executors on the basis they had no legal right to it, it's going to get very messy! And my job is to protect my client, the accountant, from a negligence claim.

Cathy

 

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Hallerud at Easter
By DJKL
30th Jan 2016 17:10

You have no doubt done this, but have you checked on Companies House and viewed what details are within the most recent annual return?

Obviously the deceased may or may not, before his death have been a designated member, but presumably there are other designated members with responsibility to submit the return.

If the return shows the representatives as members then there is a reasonable argument that the other members have so accepted them as such. (albeit their agreement/consent might have reasonably been required)

If the deceased is no longer shown as a member but the representatives are also not shown as a member it may be slightly inferred that the representatives are not being offered the membership, in that someone has at least considered the position and done something but that something does not appoint them.

Of course if the deceased is still showing as a member then all that can be reasoned is maybe nobody has considered the issue/done anything!

There is an argument, I suppose, that if the accounts show the representatives receiving an allocation of profits, and the other members (but who/how many) have signed said accounts, then they have tacitly accepted the representatives are a member.

Found this online but sources not cited, but may be useful:

Death of an LLP Member

The lack of a members’ agreement is a particular concern when a member dies. Under statute and the Regulations there are no clear provisions dealing with how a deceased’s share of an LLP should be treated. The Regulations and statute prohibit the deceased member’s personal representatives (executors) from being able to:

• Participate in the management of the business. Hence neither they nor the beneficiaries of the deceased have any right to be appointed as a member of the LLP in the place of the deceased. They can only be appointed as a new member of the LLP with the consent of all of the remaining members. This can make it difficult for the personal representatives to deal with the share that belongs to the deceased’s estate.

• Demand the transfer or repayment of the deceased’s share of the value of the LLP to the estate until the other members are ready to account for it.

The personal representatives have an equitable right not to be treated unfairly, from a financial perspective, compared with the remaining members of the LLP. However, how would the personal representatives know if they are being disadvantaged if they are prohibited from any involvement in the business?

http://www.stephens-scown.co.uk/wills-and-inheritance-planning/death-and...

____________________________

Do update us re outcome as this is one of those topics where I would be really interested to hear the outcome, we operate two LLPs but at least one has a members agreement and the other has negligible worth (negative worth)

 

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By johngroganjga
31st Jan 2016 00:16

Cathy

If your only role is to advise the executors what to put on their tax return, the answer surely is that they just enter their share of the LLP's taxable profit, as shown on the LLP's partnership return. What could be simpler?

PS And if the LLP's members want to treat the executors as one of their number and distribute profits to them why should they not be allowed to do so?

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By cathygrimmer
31st Jan 2016 08:07

@DJKL
Checking Cimpanies House was the first thing I did! I wanted to look at the filed accounts as well as the registered members. The cessation of the member by death had been reported. The personal representatives had not been appointed members and the accounts for the year following death show only the remaining members. I found the comment that you found too. The PRs definitely aren't being treated unfairly!

I'll let you know the outcome.
Cathy

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By cathygrimmer
31st Jan 2016 08:40

@johngroganjga
It isn't that simple. What would you suggest I use for basis periods, John? This is how this problem began! Opening basis periods apply when someone joins or leaves a partnership or LLP as if they were a sole trader. But the legislation is quite clear that this applies to partners in a trading partnership which, by definition, includes members of an LLP. The estate is neither.

Also, are you saying that if you had accounts for a ,say, 2 member LLP - where there are accounts showing just the 2 individuals as partners and those 2 are the only members per Companies House - that if they told you they had allocated a share of the profits to a third person (because, maybe, he'd been really helpful or lent them some money or they just liked him) you would be happy to treat them as a partner for tax purposes? More to the point, as the tax split between members/partners follows the method used to calculate the accounting split, is it acceptable under accounting standards to show as a member, and allocate profits to, someone who everyone agrees isn't a member? I'm not familiar with the accounting standards but it seems unlikely to me. However, my advice so far is that if the LLPs accountant will confirm the allocation of profits to the PRs as members of the LLP is in accordance with accounting standards and legal entitlement, we'll go with it as I'm neither a qualified accountant nor a lawyer. The liability if it's wrong is then theirs, not my clients.

I'm not sure that reliance on a clearly incorrect return would help the other partners if HMRC come calling for the tax! I am acting for the estate but there is a family connection between the deceased and the remaining members so it's difficult to just disregard what could happen to the remaining partners entirely.

Cathy

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By johngroganjga
31st Jan 2016 15:32

As far as basis periods are concerned I would just treat the estate as continuous with the deceased, as that is what the LLP is doing.

Not sure what you mean by "everyone agrees isn't a member". The members of the LLP must agree that the estate is a member. Indeed the very fact they are sharing profits with it makes it a member.

With respect I believe you are over thinking. Yes it is odd tha an LLP wants to treat the estate of a deceased partner as a member and share profits with it. But that (i.e. to be odd) is their prerogative, and if you were advising them you would have a few things to think about very carefully. But you are not advising them you are advising the beneficiary of their largesse.

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By cathygrimmer
31st Jan 2016 16:38

@johngroganjga
I appreciate you taking time to respond on this, John, but one of the problems I have is that if I treat it as continuous, we don't show any profits in the individual partner's tax return from 6 April to death, as he died before the end of the accounting date in that year, and put the whole year's profits, including the element 'earned' to date of death (before the estate as an entity existed), in the estate return for the year of death (which means a lot less tax as he was liable at 40%/45% plus nic). How can that be right? Surely death must be a cessation and rules for the year of cessation come into play? What if there is overlap relief? Who gets that? See why I'm confused!

When I say 'everyone agrees the estate isn't a member' , what I mean is that the filed accounts don't show the estate (or the deceased in the years after his death) as a member, nor is the estate a member at Companies House and no one has suggested it is a member or that it has been allocated profits because it is a member. I am told it has been given a profit share because that seemed the fair thing to do. I can't see how that makes the estate a member/partner. I don't think the problem is me overthinking this - I think the problem is no-one thought about it properly in the first place, unfortunately.

I should perhaps have mentioned (but I didn't want to confuse things further!) that the accountants for the LLP appear to have only prepared the accounts to the total profit/ total amounts due to members stage. I don't think they've been involved in splitting the profits between 'members' - the surviving members have dealt with that, and the partnership returns, themselves.

In your first response you said 'it must be wrong' which was exactly my response when I first looked at it. If I recall correctly, the legislation says an individual ceases to be a member of an LLP on death so it looks as though the only way this treatment can be right is if the estate, or the PRs as representatives of the estate, are members. Given that membership involves rights and legal responsibilities - it isn't just about being given some of the profits - I have yet to be convinced that they are.

Cathy

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By johngroganjga
01st Feb 2016 11:13

Oh! Well in that case you need to find out where in the accounts the estate's alleged profit share has been credited, and perhaps more importantly, when that profit is to be distributed to the estate.

PS

Or to put it another way, until the executors see accounts showing profit allocated to them, and due and payable to them, they should proceed on the basis that there is nothing for them to enter on tax returns or, even more so, to pay tax on. I confess that when you said that profit had been allocated to the estate I assumed you meant that that was shown in a set of LLP accounts. If there are no accounts showing the profit allocation it becomes an entirely different matter.

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