Farming Partnerships: If your farm is run by two or more partners it is vital to have a properly drawn up partnership agreement, even if your partners are also your family. A partnership agreement is a legal document that sets out the rules of the partnership, so that if something changes there is no dispute as to what needs to happen.
What happens if there is no partnership agreement?
If there is no partnership agreement the law as defined in the Partnership Act 1890 effectively writes the rules for you, and these may not be what you want. For example, without a partnership agreement the law states that all partners have an equal vote and are entitled to an equal share of the profits.
What events might require recourse to the partnership agreement?
Broadly, any fundamental change in the partners’ circumstances may trigger a dispute in the partnership. For example a death in the family, a divorce or a falling out could all become problematic if rules are not properly defined and agreed in advance.
What should the partnership agreement cover?
Partnership agreements will contain various clauses depending on the structure of the partnership. We recommend that you review your agreement with your solicitor every 3-5 years to ensure that any changes to the law or your circumstances are properly handled. At a minimum, your partnership agreement should give consideration to the following points.
A properly framed agreement will allow the business to continue if an existing partner dies or retires, or if a new partner joins the business. If circumstances such as these are not handled properly in the partnership agreement, the existing partnership may have to end and a new partnership be created. This may have unintended tax and legal consequences, for example you could be deemed to have ceased one trading business and started another.
It is important to define what an outgoing partner is entitled to; what happens to their stake in the business may come into dispute if the rules are not clearly stated in the agreement. For example if a partner either leaves the partnership or dies, what are they or the beneficiaries of their estate entitled to? The rules can be complicated and one of the key decisions to be made is whether the partnership assets are to be revalued at their current market value or whether they are to be taken at “book value”.
It is also important to consider whether the farmland is a partnership asset. If it is, you may want to include in the agreement a clause that gives the remaining partners a period of time, typically three to five years, to buy out the partner who is leaving. It is also worth considering carrying life insurance that would pay out should a partner die.
Consideration of Inheritance Tax
If certain criteria are met, the surviving partners in a trading business will usually qualify for valuable inheritance tax reliefs on the value of their share in the partnership. Additionally, if the land is not a partnership asset, a carefully thought out and defined agreement can preserve potential agricultural property relief for inheritance tax. Specific provisions governing how owners allow the firm to use the land are crucial. These provisions can also help with cross compliance inspections if there is ever any question about whether the partnership has the land “at its disposal” for subsidy purposes.
The default rule is that each partner has one vote; the vast majority of decisions are made by simple majority voting. If you believe that there are business decisions that should require qualified majority voting, or even a unanimous vote, these should be defined in the partnership agreement.
Compatibility with partners’ existing wills
It is important to ensure that the partnership agreement is compatible with the partners’ individual wills. If the farm is held on a partnership title we will discuss with you whether the partnership agreement needs to address the question of common law legal rights in the partners’ estates.
Compatibility with existing title deeds
Often farms will have been bought in chunks over the years, with some parts being taken as partnership titles 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.
If you don’t have a partnership agreement in place, get in touch to discuss how we can help you draw up this important document; doing it now could save you time and money in the future.
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.
If you would like us to review your partnership agreement or are thinking of assuming a new partner, give us a call and we will be happy to help.