Farms run as a family business tend to follow a partnership structure. However there is often a reluctance to commit the terms of the partnership to paper or else to keep the terms of an existing agreement up to date. However ensuring that your Partnership Agreement is up to date and reflects your wishes is essential for succession and tax planning purposes.

Partnership Agreements
Farming businesses can use different business structures. For example, they often start out as a sole trading business but as time goes on other family members may be included to form a farming partnership. At this stage, as all the partners are from one family, there is often a reluctance to enter into a written partnership agreement. Legally there is no requirement to put in place a written agreement but otherwise the provisions of the Partnership Act 1890 will apply by default. This includes a number of potentially unsuitable provisions such as those relating to the division of profits as well as those requiring the automatic dissolution of the partnership in the event of a partner’s death or retirement.

A dispute between partners could have potentially far reaching consequences for the continuity of the farm business. This can be avoided by having a well written agreement that provides certainty over partnership issues.

A well drafted Partnership agreement will usually include the following provisions:

  • Specify the name of the firm
  • Duration of the partnership
  • State initial capital contributions
  • Regulate the division of profits and losses
  • Provide for keeping accounts
  • Management structure and duties of the respective partners
  • Envisage events of retirement, death, dissolution, arbitration, expulsion etc.
  • Identify partnership assets and personal assets

It is also important that these provisions are kept up to date. An agreement that has been ignored when, for example, partnership accounts have been produced may simply lead to confusion and ultimately cost, in the event of a future disagreement.

Wills
The provisions of the partnership agreement applying on death may also override terms of a will when it comes to deal with a deceased partners' interest and so ensuring that any partnership agreement and the Wills of each of the partners complement each other is essential. The relevant provisions should also be understood by all partners and kept under review. If a provision is unsuitable then while renegotiating it may be difficult ignoring the issue could lead to major problems in the long term.

Availability of Tax Reliefs
Partnerships can also be an important inheritance tax planning tool.

The two main inheritance tax reliefs farmers may be entitled to are Agricultural Property Relief (APR) and Business Property Relief (BPR).

For most farming partnerships their land and buildings will qualify for APR at 100% and in many cases this will remove inheritance tax as a concern. However, APR will not apply to certain assets such as surplus let cottages. It will also not apply to the non-agricultural value of development land.

In these cases the availability of BPR is very important but this will only apply at 100% if an asset is "partnership property". As a large amount of money may be at stake the prudent course is to ensure that matters such as the ownership of partnership assets is clear.

While the availability of BPR may point towards all assets being made partnership property there are other matters to consider such as whether "legal rights" are an issue in the family and also how such assets will be treated in the firm's accounts. Proper consideration of all the issues is important.