Family farms and the importance of a Farming Partnership Agreement
20th June 2019 by Family farms and the importance of a Farming Partnership Agreement
If you run a farm as a family business, with more than two partners, it is really important to have a properly drawn up Farming Partnership Agreement, a legal written document which sets out the rules of the partnership to help avoid future disputes.
If you don’t have a Farming Partnership Agreement, you are bound by Partnership Act 1890, which being over 100 years old, is out-dated and may not be relevant to your partnership today.
For example, under the Act the partnership is automatically dissolved upon a partner’s death, which may bring about unforeseen tax or legal consequences. Given that many farming partnerships are often entered into so that future value can accrue to the next generation and to maximise the availability of inheritance tax reliefs, this can be a crippling error when compared with the costs of entering into a Partnership Agreement.
Also, in the absence of a Partnership Agreement, the annual accounts may be the only evidence of the partnership, which may be challenged by HMRC.
What should a Farming Partnership Agreement consider?
Whilst there is no one size fits all Partnership Agreement and a detailed review of the business should be undertaken by professional advisors, the following areas should be considered:
- Ownership of land – farming partnerships are usually asset rich and it is important that the Partnership Agreement and the accounts make it clear whether the farm itself is an asset of the partnership.
- Planning beyond the current position – the agreement should govern what will happen on the death or retirement of a partner and how their share will be dealt with. A key decision will be whether the partnerships assets are to be valued at their current market value or their book value.
- Decision making – often a senior member of the family, such as a parent will have control over decisions, which can include the allocation of income and capital profits, this may be of particular importance where there are minors as partners.
- Dispute – whilst there is often a temptation not to address this point because “blood is thicker than water”, a well-drafted partnership agreement will include provisions to ensure that, should a dispute progress, minimum time and expense is spent on the issue.
This is not an exhaustive list as in order to advise farming partnerships it is important for professional advisors to work together to understand the issues fully, both in terms of partnership law and accounting practice.
Victoria Boynes-Butler and Kate Mansfield have recently worked together to help Mr Piers Chichester in respect of his substantial family farming business for tax and succession planning.
Mr Chichester comments, “Only fools make big, long term decisions without gaining sound advice and I am so glad to have been able to share my big burden with such understanding and competent professionals as Kate and Victoria. Although I had some end objectives I could never have worked out the best way there without their help.”
If you don’t have a partnership agreement in place, or would like your current partnership agreement reviewed, please get in touch with Victoria today to see how we can help, hopefully saving you time and money in the future.
Victoria Boynes-Butler 01202 205027 or firstname.lastname@example.org.