Do we need a Farming Partnership Agreement?

Most family farms operate as traditional partnerships. Yet many do not have a written partnership agreement.

It’s easy to understand why many people put this off. Especially where they may have managed without for a long time. But this can cause significant problems and the loss of tax reliefs. So it is something well worth dealing with.

Also, banks now usually ask to see a written partnership agreement before lending. This is to avoid a situation where they need to freeze the account.

Without a written partnership agreement, the Partnership Act 1890 governs the situation. This leads to the dissolution of a partnership when a partner dies or retires. It may also result in the sale of partnership assets or even the whole farm.

The valuation of partnership shares will often be unclear without a partnership agreement. This can cause expensive disputes.

A partnership agreement can avoid this by making clear:

• that the partnership continues despite a death or retirement;
• how to value and pay for an outgoing partner’s share; and
• who a partner’s share goes to.

It is also important to decide whether land and buildings are:

• partnership property and owned by the partnership; or
• personal property made available for use by the partnership.

A claim of 100% relief from Inheritance Tax is possible for partnership property. But it is only 50% for personal property made available to a partnership. This is Business Property Relief.

Agricultural Property Relief from Inheritance Tax is also available at 100%. But this only covers property used for agricultural purposes. It may not be available for residential or non-agricultural buildings. Or for any development value on farmed land above its agricultural value.

So it is best to be clear about what is partnership property. Without a partnership agreement, the position is often unclear. This can lead to a dispute with HM Revenue & Customs and the loss of a valuable relief.

We help clients make sure the position is:

• recorded in the partnership agreement
• complemented by family Wills
• correct at the Land Registry

It is a good time to review the legal ownership of your property at the same time as partnership and Wills. This can be joint ownership or in separate shares. Often families/partnerships aren't sure. But it is important to make sure this works for your business and estate planning.

Having a written partnership agreement is a very important part of succession planning. It avoids unintended consequences when a partner dies. And it clarifies other matters such as decision making and the admission of new partners.

Farm businesses are evolving as farmers feel the pressure to diversify. The partnership agreement, property structure and succession planning need to be kept under review to ensure that something which worked yesterday still works today.

Please contact us if you would like to discuss your farming partnership. Telephone 01603 610911. Email info@leathesprior.co.uk.