Farming partnership agreements
- AuthorEd Ryder
Partnerships are still by far the most popular business structure for farming businesses.
Across North and East Yorkshire there are four times more farms operating as partnerships or sole traders than are incorporated as limited companies.
However, as many farms are owned by single, or extended, families, the partnerships too often rely only on the quality of these relationships to manage their business affairs.
As a result, decisions relating to farm affairs risk being resolved domestically over a cup of coffee or at meal times and not being accorded the business focus their importance merits.
Farming is far too valuable to the families involved - and to the UK economy - to be managed without formal, written agreements which provide greater focus for decision making by creating a sound legal basis for the partners and greater confidence for those they deal with.
There are many benefits to creating a written partnership agreement with a solicitor who specialises in this area, both for the financial stability of the current business and planning for future generations.
Written agreements should deal with fundamental issues including the partners’ mutual obligations, the mechanism for bringing in new partners, what happens to a partner’s share on their retirement or death; succession by children and grandchildren into the partnership, and how the value of such a share is calculated.
A written agreement is also an opportunity to clarify often long-standing misunderstandings about what is partnership property and what, for example, maybe owned by a partner outside the partnership even though it maybe used by it.
The latter is an important financial consideration as property owned separately by a partner but used for partnership business is taxed differently and it helps to set these matters down to avoid shocks from incorrect assumptions later on.
To be thorough, a partnership agreement should include a schedule of assets that relate to the land capital account, which should detail all partnership land and its value as drawn up by the partnership’s accountant.
Confirmation that an asset belongs to the partnership can mean the difference between 100 per cent Business Property Relief for Inheritance Tax, if it is partnership property, and only 50 per cent Business Property Relief, a significant halving of the asset’s value, when calculating the deceased’s assets for inheritance purposes.
This is because land or buildings owned by a partner outside of the partnership but used by the partnership qualify for only 50 per cent Business Property Relief.
A written partnership agreement should include a schedule of partnership property and assets held outside the partnership together with a formal agreement concerning partnership use of some individual assets that could be a lease, or tenancy agreement, depending on the type of assets in question.
Confirming which assets are included in the partnership in a written agreement can also save lengthy and costly correspondence and arguments with H M Revenue and Customs (HMRC).
This is because, when people realise that 100 per cent Business Property Relief is available, they often try to claim that land was actually in the partnership with little, or negligible, evidence that this was the case.
The HMRC will investigate this in detail due to the potential value of the relief and the professional fees for dealing with HMRC queries relating to this possibly lengthy additional work can be avoided with a detailed, dated partnership agreement. They can actually help to save significant sums of money!
In the absence of a written partnership agreement, the partnership automatically ceases on the death of one of the partners and this can lead to considerable practical difficulties if, for example, the deceased was a signatory on the business’s bank account.
A written partnership agreement makes it easier to show HM Revenue and Customs that there is a clear business structure in place. A farm cannot qualify for Business Property Relief if it is not trading and a partnership agreement helps to show that the farm is active. This can be particularly relevant for mixed, or diversified, farms where there is traditional farming and some buildings let, for example, as holiday cottages.
However, it must be remembered that Agricultural Property Relief for inheritance tax relates only to the agricultural value of an asset.
If farms include land, with a potential uplift in value because of actual, or potential, planning permission, the difference in value between the agricultural value and the open market value, could be significant, and caught only by Business Property Relief. A successful claim for this is far more likely if there is a written partnership agreement.
The creation of a written agreement should also encourage each partner to consider how it interacts with provisions in their wills so they can understand what they are able to bequeath under the terms of the partnership agreement when the business continues.
The agreement can also address matters such as whether the continuing partners should make a payment to the estate and if a bequeathed partnership share is being left proportionality to the existing partners.
Whatever the future holds for the UK within, or outside the EU, farmers can expect business to remain challenging. Having a written partnership agreement is part of working smarter to address this.
Ed Ryder's article was published in Northern Farmer in early 2019