Agricultural Partnership agreements
Pitfalls of undocumented partnerships
Many farms are family owned and run in what would be described as a partnership but often this has not been formalised with a legal document. It is understandable that many farming families do not see the need for this but, there are advantages in having this legal documentation in place.
Unintended consequences
Without a written partnership agreement, the situation comes under the Partnership Act of 1890 which can cause unintended consequences for the family which can be pretty dire.
Under this antiquated but still legally binding act, the partnership is dissolved when a partner dies or retires, rather than it being passed on to the next generation. As the Partnership Act takes precedence over any Will, this potentially can result in the sale of the assets of the partnership, or indeed the whole farm, even if there is a valid Will leaving it to the next generation. Rather a sobering thought for those without a partnership agreement in place.
Restrictions on borrowing
Another issue which is more commonplace these days, is that many banks require a partnership agreement to be in place for them to be willing to lend.
Certainty for the future
A legally binding partnership agreement brings clarity and certainty to situations which may arise in the future which could potentially not been considered otherwise. They include:
- Continuity of the partnership and the business following death or retirement
- How a partner’s share is distributed and to whom
- How to pay for this share
- Detail of how the farm assets and buildings are owned and by whom
Tax relief and partnership agreements
A frequently overlooked advantage of having a partnership agreement in place is with regard to tax relief. Farms which have a partnership agreement can benefit from tax relief which is not available to those without one.
There are two main types of tax relief available to farms via a partnership agreement:
- Business Property Tax Relief
It is possible to claim full relief from inheritance tax for a property which comes under a partnership agreement. However, the relief is only 50% for personal property which is being utilised by the partnership. - Agricultural Property Tax Relief
This is also applicable at 100% for property belonging to the partnership but only covers property which is used for agricultural purposes and not for buildings which are purely residential or used for other non-agricultural purposes. It is also not applicable for development potential value for agricultural land.
Clarity from a partnership agreement
By having a formal partnership agreement drawn up, the detail of what belongs to the partnership is clearly set out to avoid any future confusion or conflict. It has the added advantage of being able to take advantage of tax relief only available to property or assets defined as being legally held within a partnership agreement.
Get in touch
If you would like to find out more about setting up a partnership agreement for your farm, our friendly and experienced team would be glad you hear from you. You can reach us by calling 01872 241408 or by emailing info@penderlaw.co.uk
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