Most farm businesses owned and run by more than one person are subject to farm partnership.
Farm partnerships are particularly common among farming families. They are also used to establish new farming businesses between two or more unrelated people because they create business efficiencies and tax relief.
However, they’re not without their drawbacks, the main one being they require no formal written agreement to create. This can often lead the business directors – particularly members of the same family – to fall into the trap of thinking there is no need to write down the conditions of the partnership.
Unfortunately, however, this leaves all members of the partnership vulnerable in the event it breaks down, which so often occurs between relatives.
Farming partnership agreements
Ian Parker, Director of Whitley Stimpson and farm business expert, says for this reason, having clear documentation that defines the conditions of the partnership is vital to protect all parties.
Without this, Ian says, disputes over land and property ownerships can easily arise should the partnership fall apart, with each partner assuming they have a charge on the assets.
“It is very common for the partners to share in the profits of a farm partnership but at the same time, not own the land being farmed. This might be owned by other partners in the arrangement. But without a formal, written farming partnership agreement in place, this might not be clear. So, in the event of a partnership breaking down, the beneficial owners within the partnership might feel they have a claim on the farm business assets that they’re not actually entitled to. In the event of a legal challenge against them, the partners who do own the land may have to pay out a lot of money to prove their case if there is no formal partnership agreement in place. If a farming partnership breaks down in the absence of such an agreement, the fallout, particularly for families, can be very messy indeed.”
Inheritance tax and new borrowing facilities
Ian added that the lack of a written farm partnership agreement can also cause problems relating to inheritance tax (IHT).
“Many farmers believe that the hope value of farmland will be covered by Business Property Relief (BPR), but this isn’t always the case,” he said. If the assets are not partnership assets and just held by individuals but used by the partnership then you are only eligible for 50% business property relief. Given how much hope value can amount to, this could leave a very large IHT exposure.”
Finally, Ian said, it is becoming more common for banks and other lenders to require a formal farming partnership agreement prior to approving further business funding.
“This is just another reason to get a formal, written agreement in place,” he said. “Going into business with your family does not mean you don’t need a written agreement. In fact, in our experience, farming families are prone to disagreements, so protecting each member with a farm partnership agreement will serve a lot of time, money, and heartache should the partnership need to be dissolved. My advice would be if you don’t have one in place, get one sorted out and review it annually to ensure it is always accurate, relevant and up to date.”
For more information on farm partnerships and farm partnership agreements, get in touch on (01295) 270200 or email firstname.lastname@example.org.