Retiring as a partner in an accountancy practice

Q: What regulatory and HMRC steps follow?

Professional body record. ICAEW must be informed of changes to a member firm's principals. The firm should also check it can still use the description Chartered Accountants, is still supervised for AML, and remains eligible for regulated work such as audit, investment business or probate. Two partners becoming one. If a two partner firm becomes a sole practice, that is a change of legal entity for HMRC agent purposes: HMRC guidance requires a new agent services account, fresh client authorisations and removal of the old account, and says agent codes must not simply be moved. Under regulation 26 of the Money Laundering Regulations 2017, a sole practitioner must be approved by their supervisory authority. Run off cover. ICAEW's PII Regulation 2.7 requires reasonable steps to ensure cover for at least two years after ceasing practice, which paragraph 6.31 says may be under the continuing firm's policy. ICAEW recommends six years in total. See run off cover for retiring accountants. Practising certificate. A consultant who gives up the certificate must not be held out as a principal. ICAEW says clients should be told clearly, the retiring partner should be removed from the partners section of the website, and other roles such as work for friends and family need separate assessment. Creditors and tax. Giving notice of retirement to people who dealt with the firm is covered in retiring partner liability.

A partner retiring from an accountancy practice should work from the partnership or LLP agreement: it sets the notice, how capital is repaid and whether any annuity is paid. Alongside that sit the practice specific steps: telling clients, updating the firm’s record with its professional body, HMRC agent access and AML approvals, run off cover, and making sure a partner who stays on as a consultant is not still held out as a principal.

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Where should a retiring partner start?

With the agreement. It should cover the notice period, any retirement age, how the outgoing share is valued, the timetable for paying it, restrictions on acting for clients afterwards and any consultancy. See partnership agreements.

Without an agreement the default rules are blunt. Under section 26(1) of the Partnership Act 1890, where no fixed term has been agreed any partner may end the partnership by notice to all the others, and section 32(c) says such a partnership is dissolved from the date in the notice. A partner in a partnership at will who simply announces retirement may therefore dissolve the whole firm. The usual answer is a retirement agreement with the continuing partners. The general law is in leaving a partnership, and members of an LLP should read retiring as an LLP member.

How should the timing be planned?

The notice period needs to allow time for a client handover and for the firm to recruit or promote a successor. Useful points to align are the firm’s accounting date, so the final profit share is simple to calculate; the professional indemnity renewal date; and the busy season, so the handover does not compete with January deadlines. ICAEW notes that a handover period to bring the new engagement partner up to speed is common practice.

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How is the retiring partner’s capital repaid?

Subject to the agreement, section 43 of the Partnership Act 1890 makes the amount due to an outgoing partner for their share a debt arising at the date they leave. If the continuing partners keep using the firm’s assets without settling, section 42(1) gives the outgoing partner, unless otherwise agreed, the choice of a share of later profits attributable to their share of the assets or interest at 5% a year. Section 42(2) removes this where the agreement gives the continuing partners an option to buy the share and they exercise it properly.

Most agreements replace these rules with a valuation based on the capital and current account balances and a repayment timetable, often in instalments so the firm’s cash flow can absorb it. Amounts held back for the retiring partner’s tax should be dealt with explicitly. See capital and current accounts.

How do retirement annuities work?

Some practices pay a retired partner an annuity out of future profits instead of, or as well as, paying for goodwill. HMRC’s Partnership Manual explains the tax:

If the annuity is charged in the partnership accounts it is added back, and relief is given by allocating it to the partners in their profit sharing ratios (PM163405).
Annuities to retired partners must be paid net of basic rate tax under section 900 of the Income Tax Act 2007 (PM163405).
The continuing partners claim relief on their own returns under section 448 of that Act (PM163410).
No relief is available where the obligation was taken on as part of the price for acquiring a partnership business, following Parnalls Solicitors Ltd v HMRC (PM163410). This catches annuities inherited through a merger or acquisition.

For capital gains, Statement of Practice D12 paragraph 9.2 treats the capitalised value of an annuity as disposal proceeds only if it is more than a reasonable recognition of the partner’s past work. For a partner of at least ten years, paragraph 9.3 accepts an annuity of up to two thirds of their average share of profits in the best three of the last seven years, with smaller fractions for shorter service. A lump sum paid on leaving is consideration for the disposal of the partner’s share in partnership assets (paragraph 9.1). Accounting for annuities in an LLP is covered in retirement benefits to LLP members.

Where there is a gain, Business Asset Disposal Relief may apply to a disposal of all or part of a partnership interest. GOV.UK says the partner must have been a business partner for at least two years, the rate is 18% for disposals from 6 April 2026, and the lifetime limit is £1 million.

How should clients be told?

ICAEW’s helpsheet on changes in the composition of a firm says clients are ordinarily the firm’s clients, not an individual principal’s, and usually stay when a principal leaves, though they keep the right to choose their accountant. Changes in engagement partner or key contacts should be clearly communicated. If clients do follow the retiring partner elsewhere, the change of appointment rules in section 320 of the Code still apply, and ICAEW notes a departing principal may be restricted by the partnership agreement or covenants.

Good practice is a joint letter from the retiring and successor partners, followed by meetings with key clients, and updated engagement letters where the retiring partner was named.

What regulatory and HMRC steps follow?

Professional body record. ICAEW must be informed of changes to a member firm’s principals. The firm should also check it can still use the description Chartered Accountants, is still supervised for AML, and remains eligible for regulated work such as audit, investment business or probate.
Two partners becoming one. If a two partner firm becomes a sole practice, that is a change of legal entity for HMRC agent purposes: HMRC guidance requires a new agent services account, fresh client authorisations and removal of the old account, and says agent codes must not simply be moved. Under regulation 26 of the Money Laundering Regulations 2017, a sole practitioner must be approved by their supervisory authority.
Run off cover. ICAEW’s PII Regulation 2.7 requires reasonable steps to ensure cover for at least two years after ceasing practice, which paragraph 6.31 says may be under the continuing firm’s policy. ICAEW recommends six years in total. See run off cover for retiring accountants.
Practising certificate. A consultant who gives up the certificate must not be held out as a principal. ICAEW says clients should be told clearly, the retiring partner should be removed from the partners section of the website, and other roles such as work for friends and family need separate assessment.
Creditors and tax. Giving notice of retirement to people who dealt with the firm is covered in retiring partner liability.

How might a retirement be structured?

Illustration only. A partner in a four partner firm retires after 20 years. Their average share of profits in the best three of the last seven years is £120,000, and their capital account stands at £90,000.

The agreement repays the £90,000 capital in three annual instalments of £30,000. This is a return of capital, not income.
The firm pays an annuity of £30,000 a year. This is well within the two thirds limit of £80,000 in SP D12 paragraph 9.3, so it is not treated as disposal proceeds.
The annuity is paid net of basic rate tax, and the three continuing partners claim relief on their own returns.
The partner stays as a part time consultant without a practising certificate, is removed from the website partner list and is introduced to clients as a consultant.

What mistakes come up most often?

Giving notice in a partnership at will without a retirement agreement, so the whole firm dissolves.
Staying on as a consultant while still appearing as a partner.
Treating annuities as a partnership expense instead of allocating them to partners.
Assuming relief on annuities taken on when the firm bought another practice.
Forgetting to update the professional body record and the HMRC agent position.
Leaving run off cover to an informal promise from the continuing firm.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.