R05 Partnership protection: free practice questions

1. Question 1 of 5

   Under the Partnership Act 1890, what happens to a partnership without a partnership agreement when a partner dies?

   Option A: It continues automatically with the surviving partnersOption B: It converts into a limited companyOption C: The deceased partner's share passes to the other partnersOption D: It is automatically dissolved

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   The answer is D: It is automatically dissolved

   Without an agreement, death dissolves the partnership and capital accounts must be distributed. A partnership agreement can prevent dissolution on death.

   Why the other options are wrong

   A

   Without an agreement, the partnership doesn't simply continue.

   B

   A partnership doesn't convert into a limited company.

   C

   The share doesn't automatically pass to the other partners.

2. Question 2 of 5

   Under a partnership cross-option arrangement, how is each partner's life policy usually set up?

   Option A: As a whole of life policy in trust for the partner's own familyOption B: On their own life in trust for the other partners, excluding the settlorOption C: As a life of another policy owned by the partnership firmOption D: As a joint life first death policy covering all of the partners together

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   The answer is B: On their own life in trust for the other partners, excluding the settlor

   Each partner typically takes out index-linked term assurance to retirement on their own life, in trust for the other partners as trustees and beneficiaries. The settlor is usually excluded, though some trusts allow reversion if they leave.

   Why the other options are wrong

   A

   The trust is for the other partners, not the partner's own family.

   C

   The firm doesn't own the policies under a cross-option arrangement.

   D

   A joint life first death policy isn't the usual structure.

3. Question 3 of 5

   What is a limitation of automatic accrual for partnership protection?

   Option A: It covers only the goodwill share, so the capital account may still be dueOption B: The policies involved cannot be written under any trustOption C: It always causes the loss of Business Relief for IHTOption D: It requires every partner to buy all of the other partners' shares on death

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   The answer is A: It covers only the goodwill share, so the capital account may still be due

   Automatic accrual passes the deceased's share, the goodwill, to the survivors, with family compensated by a policy in flexible trust. Survivors are still liable to pay out the balance on the capital account.

   Why the other options are wrong

   B

   The policies are usually written under a flexible trust.

   C

   Automatic accrual doesn't always cause loss of Business Relief.

   D

   Under automatic accrual the share passes to the survivors; they don't buy it.

4. Question 4 of 5

   How does partnership share protection differ from directors' share protection regarding unequal premiums?

   Option A: Partnerships are legally required to equalise all premiumsOption B: Unequal premiums are never permitted for partnership arrangementsOption C: Unequal premiums paid as a first charge on profits remain commercialOption D: Partnership premiums qualify for income tax relief

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   The answer is C: Unequal premiums paid as a first charge on profits remain commercial

   For partnerships, premiums paid as a first charge on profits spread the cost fairly, so unequal premiums do not undermine commerciality. The arrangements otherwise mirror directors' share protection.

   Why the other options are wrong

   A

   There's no legal requirement to equalise partnership premiums.

   B

   Unequal premiums are permitted for partnerships when paid as a first charge on profits.

   D

   Partnership share protection premiums don't get income tax relief.

5. Question 5 of 5

   Do the partnership protection methods also apply to a limited liability partnership (LLP)?

   Option A: Yes, the same methods are equally applicable to an LLPOption B: Only if the LLP has more than ten members in totalOption C: No, LLPs must use key person cover onlyOption D: No, LLPs cannot own life policies on their members

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   The answer is A: Yes, the same methods are equally applicable to an LLP

   An LLP is a body corporate with separate legal personality, but buy-and-sell, cross-option and automatic accrual methods apply equally to LLPs.

   Why the other options are wrong

   B

   There's no minimum number of members.

   C

   LLPs can use share-style protection, not just key person cover.

   D

   LLPs can own life policies.

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