Home Insights Why are Partnership Agreement’s important in farming businesses?

Why are Partnership Agreement’s important in farming businesses?

By Ensors Team
6th Sep 2019

Many farming businesses do not have a formal Partnership Agreement, possibly because the partners are all family members, with the only evidence of the partnership being the annual accounts.

Without a formal agreement the fall-back position is The Partnership Act 1890. This Act is nearly 130 years old and its provisions are not well suited to the requirements of a modern farming partnership, for example, if a partner dies the partnership is automatically dissolved.

Another potential issue is that it is often unclear if the farmland and buildings are partnership property or owned personally by the partners. This can have serious Inheritance Tax implications.

Currently, where a farming partnership is wholly or mainly trading, any partnership property will be eligible for full Business Property Relief (BPR), however, if the property is owned personally by the partners and used in the trade it will, at best, only be achieve 50% BPR. Agricultural Property Relief is not the answer either as this only applies to assets used for agricultural purposes and only covers the agricultural value, which may not be the market value.

To achieve full BPR the farmland and buildings need to be partnership property and it is often assumed that merely including the property in the annual accounts is enough to demonstrate this.  Without documentary evidence to support this it is open to challenge by HMRC, therefore it is strongly advisable to have a formal written Partnership Agreement drawn up to document:

  • What partnership property is included and to which partner’s property capital account it is attributable.
  • How profits, both income and capital, are divided between the partners.
  • What happens if a partner dies or wants to leave the partnership.

A final point to note if drafting, or updating, a Partnership Agreement is to consider the interaction with the partners’ Wills. If land and property is included as partnership property it can no longer be left to a beneficiary in a Will, only the partner’s interest in the partnership can be left. It is therefore advisable to review Wills at the same time as updating a Partnership Agreement to ensure one does not contradict the other.

For more information please contact Wayne Horrex.