Buying into a practice as a new partner

Q: How do new partners usually fund the buy in?

The common routes are: A personal term loan, often from a bank that already lends to the firm and understands its numbers. The partner borrows personally and introduces the money as capital. Phased contributions, where part of the capital is paid on admission and the rest is built up by retaining a slice of the new partner's profit share for two or three years. Deferred goodwill payments, where any goodwill element is paid by instalments, sometimes out of future profit shares. In an LLP the route can affect employment status. A member who meets all three salaried member conditions in sections 863A to 863D of the Income Tax (Trading and Other Income) Act 2005 is taxed as an employee. Condition C is met if the member's capital contribution is less than 25% of their expected disguised salary for the tax year, so a meaningful contribution is often how a fixed share member stays self employed. HMRC's Partnership Manual at PM258100 accepts that a member may borrow to make the contribution where it is genuine, enduring and gives rise to real risk, but warns that limited recourse loans and loans from the LLP or a connected person can trigger the anti avoidance rule. Capital that the member is entitled to draw back is excluded from the contribution by section 863E(6). The wider rules are in LLP salaried members.

Q: How does it work in numbers?

Illustration only. Priya is admitted as a partner and must contribute £60,000 of capital. She borrows £60,000 at 7% and pays it in. No goodwill is charged. Annual interest is £4,200. If her income is taxed at 40%, relief under section 398 saves £1,680 a year, and the claim is well within the section 24A cap. In year three the firm reduces its capital requirement and returns £15,000 to her, which she spends on a car. Under sections 406 and 407 she is treated as having repaid £15,000 of the loan. Relief is then due only on interest on £45,000, which is £3,150 a year at 7%, even though she still owes the bank £60,000. Had the firm instead charged a £20,000 goodwill premium paid directly to the existing partners, that would be their disposal proceeds under SP D12 and Priya's base cost for a future disposal.

A new partner in an accountancy firm usually pays two things: a capital contribution that funds the firm’s work in progress, debtors and equipment, and in some firms a payment for a share of goodwill. Most fund it with a personal loan or by leaving profits in the firm, and interest on a loan used to buy into a trading or professional partnership can qualify for income tax relief under section 398 of the Income Tax Act 2007, provided the capital stays in.

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What does a new partner actually pay for?

The admission deed or partnership agreement sets the price, but the components are usually the same.

Capital. Accountancy firms carry a lot of working capital: unbilled time, unpaid fees and the cash needed to pay staff while that time turns into cash. Partners fund this through their capital accounts, normally in proportion to their profit share. It remains the partner’s money and is repaid on leaving under the agreement. See capital and current accounts.
Goodwill. Some firms charge an incoming partner for a share of the goodwill, either paid to the firm or directly to the existing partners. Many firms now place no value on goodwill between partners, so a new partner pays nothing for it and receives nothing for it on retirement. ICAEW’s helpsheet on buying and selling fees notes that admitting a principal is similar to a purchase of fees, although normally expressed as the purchase of a percentage of the equity or goodwill.

Without an agreement, section 24(1) of the Partnership Act 1890 says partners share equally in capital and profits, and regulation 7(1) of the Limited Liability Partnerships Regulations 2001 says the same for LLP members. See partnership agreements.

How do new partners usually fund the buy in?

The common routes are:

A personal term loan, often from a bank that already lends to the firm and understands its numbers. The partner borrows personally and introduces the money as capital.
Phased contributions, where part of the capital is paid on admission and the rest is built up by retaining a slice of the new partner’s profit share for two or three years.
Deferred goodwill payments, where any goodwill element is paid by instalments, sometimes out of future profit shares.

In an LLP the route can affect employment status. A member who meets all three salaried member conditions in sections 863A to 863D of the Income Tax (Trading and Other Income) Act 2005 is taxed as an employee. Condition C is met if the member’s capital contribution is less than 25% of their expected disguised salary for the tax year, so a meaningful contribution is often how a fixed share member stays self employed. HMRC’s Partnership Manual at PM258100 accepts that a member may borrow to make the contribution where it is genuine, enduring and gives rise to real risk, but warns that limited recourse loans and loans from the LLP or a connected person can trigger the anti avoidance rule. Capital that the member is entitled to draw back is excluded from the contribution by section 863E(6). The wider rules are in LLP salaried members.

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Is the interest on a loan to buy in tax deductible?

Not as a business expense of the firm, but the partner can usually claim qualifying loan interest relief. Section 398 of the Income Tax Act 2007 covers a loan used to purchase a share in a partnership, to contribute capital or premium that is used wholly for the partnership’s trade or profession, to advance money to the partnership for that use, or to repay another such loan.

Section 399 adds two conditions. Condition A is that the borrower has been a member of the partnership throughout the period from using the loan until the interest is paid, other than as a limited partner in a registered limited partnership or a member of an investment LLP. Section 399(5) treats a senior employee of a professional partnership as a member where they deal with clients independently and are indistinguishable from the partners in relations with clients. Condition B is that no capital has been recovered from the partnership in that period, apart from amounts treated as repaying the loan.

Recovering capital is the trap. Under sections 406 and 407, if the partnership returns capital, repays a loan or advance from the partner, or the partner sells part of their interest, the partner is treated as having repaid that amount of the loan, whether or not the bank is actually repaid. Interest relief is then only due on the reduced balance.

HMRC’s helpsheet HS340 confirms that relief extends to buying into or funding an LLP other than an investment LLP, and that interest on overdrafts and credit cards does not qualify. The claim goes in box 5 of the ‘Other tax reliefs’ section on the additional information pages (SA101), and HS340 tells you to get and keep the lender’s certificate of interest paid. Qualifying loan interest is one of the reliefs capped by section 24A: the total of the capped reliefs cannot exceed the greater of £50,000 and 25% of adjusted total income. More detail is in relief on loans to invest in a partnership or company.

How is a payment for goodwill treated for capital gains tax?

Statement of Practice D12 deals with this. Where an incoming partner pays the existing partners directly, outside the partnership accounts, section 7.1 treats the payment as consideration for the disposal of part of their share in the partnership assets, and notes that such payments are often for goodwill not shown in the balance sheet. The partners receiving it will have no base cost to set against it unless they made a similar payment themselves (section 7.2).

The incoming partner cannot deduct the payment against income. Under section 7.3 it is allowed only in computing a gain or loss on a later disposal of their share, and they can claim a loss on leaving, or when their share is reduced, if they then receive less. Section 8.2 confirms that transactions between an incoming partner and the existing partners are not treated as between connected persons where they are genuine commercial arrangements, so market value is not normally substituted. See partnership capital gains and SP D12.

What should the admission terms cover?

The capital required, when it is due and whether it changes as the profit share grows.
Whether capital earns interest, and whether any goodwill payment is made and to whom.
How and when capital is repaid on retirement or expulsion, and any limits on withdrawals while a partner.
The starting profit share and how it progresses, which links to the firm’s profit sharing model.
Liability for existing debts. Section 17(1) of the Partnership Act 1890 says a person admitted to an existing firm does not thereby become liable to creditors for anything done before they became a partner, but the agreement should still deal with old claims; see new partner liability for old debts.

Section 24(7) of the 1890 Act requires the consent of all existing partners to introduce a new partner unless the agreement says otherwise, and regulation 7(5) of the LLP Regulations has the same default for LLP members.

What regulatory steps come with becoming a partner?

Regulation 26 of the Money Laundering Regulations 2017 says no person may be a beneficial owner, officer or manager of an accountancy or tax advisory firm unless approved by the firm’s supervisory authority, and the firm must take reasonable care that no one is appointed as an officer or manager without approval or a pending application. The approval application should therefore be made before the admission date. See AML supervision for accountants.

ICAEW’s helpsheet on changes in the composition of a firm says firms must notify ICAEW of changes in practice structure, should check they can still use the description Chartered Accountants and remain eligible for regulated work, should tell their professional indemnity insurer as the policy requires, and may need to update their HMRC agent account.

How does it work in numbers?

Illustration only. Priya is admitted as a partner and must contribute £60,000 of capital. She borrows £60,000 at 7% and pays it in. No goodwill is charged.

Annual interest is £4,200. If her income is taxed at 40%, relief under section 398 saves £1,680 a year, and the claim is well within the section 24A cap.
In year three the firm reduces its capital requirement and returns £15,000 to her, which she spends on a car. Under sections 406 and 407 she is treated as having repaid £15,000 of the loan. Relief is then due only on interest on £45,000, which is £3,150 a year at 7%, even though she still owes the bank £60,000.

Had the firm instead charged a £20,000 goodwill premium paid directly to the existing partners, that would be their disposal proceeds under SP D12 and Priya’s base cost for a future disposal.

What mistakes do new partners make?

Funding capital from an overdraft or credit card, where no relief is available.
Drawing capital back, or letting the firm repay it, without realising interest relief is restricted.
In an LLP, borrowing from the firm itself to make the capital contribution and assuming Condition C is failed.
Paying goodwill without a written record of the amount and what it bought.
Not checking how the first years are taxed; see partners joining and leaving.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.