Farming Partnerships & the Importance of a Written Agreement

Farming - LHP Accountants

Author: LHP Associate Director and Farming Specialist Rhys Jones

Most farms in Wales are farmed by a family partnership. Over the years, new partnerships will have been formed as children join the partnership and parents leave, typically on death.  The process may well have been repeated over several generations without a written partnership agreement ever being in place.

Although there is no legal requirement to have a formal written partnership agreement in place, this can cause serious problems where there are disputes between partners. It can also have inheritance tax implications where, in the absence of a partnership agreement, it is unclear whether the farmland and buildings are ‘personal assets’ or ‘partnership assets.’

A partnership agreement will usually include the following provisions:

  • a statement of the initial capital contributions of the partners
  • a statement of how profits and losses are to be divided between the partners
  • details of the duties of respective partners
  • details of what happens in the event of death, retirement, or expulsion of partners
  • details of how disputes are resolved
  • an identification of partnership assets and personal assets.

In the absence of a written partnership agreement, the provisions of the Partnership Act 1890 apply, which is now 130 years old and not well-suited to the requirements of a modern farming partnership.

One example of this is that under the 1890 Partnership Act, the partnership automatically dissolves on the death of a partner.  The value of the deceased partner’s interest in the partnership then becomes owing to the deceased partner’s estate. This would not be a problem where the beneficiaries are already partners in the farm and therefore have no desire to liquidate the assets they are entitled to. However, where this is not the case, the personal representative of the estate would be entitled to require a sale of the share of the farming land to which the beneficiary was entitled, in order to raise the cash needed to purchase the deceased partner’s share. 

To avoid scenarios like this, provisions could be made in a formalised partnership agreement either stating that a deceased’s partner’s estate is not entitled to a share of the land capital in the partnership, or that the deceased partner’s interest can be bought in instalments over a defined period and therefore avoiding the need to sell farm assets on the open market.

In terms of inheritance tax, under current legislation, where a farming partnership is wholly or mainly trading, any ‘partnership property’ will be eligible for Business Property Relief (BPR) at a rate of 100%. However, if the property is owned personally by the partners but used in the trade, it will only achieve BPR at a rate of 50%. With development land values increasing, having a strong partnership agreement clearly stating what assets comprise partnership assets, provides evidence to support a 100% BPR claim where this is being challenged by HM Revenue & Customs.

In summary, a written partnership agreement provides a document that can be referred to when disputes occur between partners and relations so that matters are not left to solicitors to argue over in the courts.  A strong partnership agreement can also help preserve Inheritance Tax reliefs such as Business Property Relief and protect assets which are classed as personal assets and don’t belong to the partnership. 

Let’s Talk

If you need advice regarding forming a written partnership on your farm, please don’t hesitate to contact team LHP. Drop us a line on Let’s Talk and we will get in touch at your nearest convenience. With over 85 years’ experience helping farming businesses thrive, adapt and grow and with 5 offices based across South Wales in Lampeter, Carmarthen, Cross Hands near Swansea, Haverfordwest and Tenby, you are in safe hands with us.

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