The importance of having a farming partnership agreement

The importance of having a farming partnership agreement

We are currently dealing with a number of Farming Partnership disputes and some of our colleagues are similarly engaged. Many of the matters that are arising could have been avoided or more easily resolved if there had been a written partnership agreement in place.

If you run your farming operation with others, it really is essential to have a properly drawn up partnership agreement. That is the case even where your partners are family members.  A partnership agreement is a legal document that regulates how the partnership operates.

What happens if there is no partnership agreement?

If there is no written partnership agreement the partnership will be regulated by The Partnership Act 1890 (‘the 1890 Act’). Its provisions may well not be suitable for your farming operation. For example the 1890 Act contains provisions which give all partners an equal vote and an equal share of the profits. It also states that the partnership will dissolve if one of the partners dies. That may be very undesirable, since unintended tax and legal consequences may ensue.

What should the partnership agreement cover?

A written partnership agreement can cover many matters, as appropriate in the situation, such as the name of the partnership, its commencement date and place of business, capital contributions, capital assets, withdrawal of capital, voting rights as well as what happens if someone dies, resigns or is assumed to the partnership. To avoid cessation of the partnership on the death of a partner the agreement should contain a clause to say the trade will continue. Consideration should also be given to how to deal with surviving partners paying out and the beneficiaries of a deceased partner. The agreement can also regulate the management of the partnership.

Ownership of land and tax

When drafting a partnership agreement it is important to consider whether the farmland is a partnership asset. Often farms will have been bought in parts over the years, with some land being taken in the name of the partnership and some in the name of individuals. When drawing up a partnership agreement it is important to study the title deeds to understand the legal ownership of the farm so that this is correctly defined and handled in the agreement.

From an inheritance tax perspective, only partnership property qualifies for 100% business property relief. Farmland held outside the partnership has relief at only 50%. There is no such distinction as regards agricultural property relief but maximising business property relief may be of particular benefit where land has development value or there are non-agricultural assets.

Where land is not partnership property a transfer to the partnership may be achieved by a formal conveyance of the land to the partnership or entering into a declaration to the effect that the land is held for the benefit of the partnership (this might require an entry to be made and kept updated in the Register of Persons Holding a Controlled Interest in Land). Both have tax implications and a carefully thought out and defined agreement with appropriate land capital accounts can be used to mitigate the potential tax.

Compatibility with partners’ existing wills and the title deeds

It is important to ensure that the partnership agreement is compatible with the partners’ individual Wills and if the farm is held on a partnership title or on trust for the partnership you may need to consider the question of legal rights in the partners’ estates.

Legal rights may be claimed on the death of a Scottish domiciled individual by the surviving spouse and children. A claim to legal rights can only be made on the deceased’s moveable estate which would normally exclude land. If land is partnership property the deceased’s interest in the land may be subject to a legal rights claim.

Any partnership agreement should be drafted to deal with the issue of legal rights to provide the partners with certainty about who can and will inherit their farm.

What are my next steps?

If you don’t have a partnership agreement in place, we suggest that you give serious consideration to having one drawn up. This could save you time, money and strife in the future.

Equally if you haven’t reviewed your partnership agreement for a while, look it out and make sure it is still fit for purpose. Ideally partnership agreements, like wills, should be reviewed every 3-5 years to check whether there have be any changes to legal or tax rules that need to be thought about. Additionally, the agreement should be reviewed every time a partner leaves or a new partner joins.

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