Ashtons Legal acts for many farming and non-farming family partnerships. The farmland, cottages and houses may or may not be within the partnership and there will be inheritance tax and capital gains tax consequences depending on that.
Written or confirmatory farm partnerships are an ideal vehicle for succession, bringing in the next generation whilst also being able to limit land ownership and control by the wording. They can also bring tax benefits when diversifying a business.
With the significant drop in crop subsidies in 2024, all farms will look at how they generate more non-farm and non-traditional crop incomes. Diversification will be key to survival for most family farms, and family members may need to get non-farm jobs.
If there is no written agreement, under the Partnership Act 1890 the partnership automatically dissolves on a death. This normally comes as an unwelcome surprise at a time when the remaining partners are distressed by the passing of a partner. The fact that they do not have an automatic right to buy the deceased partner’s share is often unacceptable, but that is the effect of the law where there is no written agreement.
This was confirmed in the 2019 case of Kingsley v Kingsley where an unwritten partnership case was heard in the High Court. The Court emphasised that this case and the thousands of pounds in professional fees could have been avoided had there been a written agreement.
It is often the case that a partnership covering land owned by the partners can be tax efficient both for inheritance tax and capital gains tax, but there needs to be clear evidence of what land is in the business, who owns it, and what can be done with the land in the partnership by the landowner.
To put land into a partnership you need a written deed and you need to tie it in with the appropriate partner’s property account as well as with the partnership agreement. At present there are favourable tax implications if you can comply with these three points, and to do this, you will need a solicitor and accountant’s input.
If a partnership is unwritten, on death it is automatically dissolved and there is an automatic right of sale of all the partnership assets at market value. Plus, in reality a lot of banks will freeze the assets of a partnership if one of two partners die, and as a law the farm becomes a sole trader.
A written partnership normally expressly states continuity of the business on a death, and also empowers the remaining partners to operate the bank account. It also usually sets out the mechanism by which the partners can acquire a deceased‘s partners share, and enables the business to continue with the remaining partners.
In the Kingsley case, the executors applied for market value sale on the death of the brother, Roger. Roger and his sister did have a written partnership agreement but it was never signed which led to the lengthy court argument.
Updating partnership wording can be done at the same time as bringing in the next generation and a partnership agreement also records voting, profit and loss and valuation clauses. It is sensible to tie it in with partners’ wills, as a partnership agreement overrides a will.
Land in a partnership cannot really be left in a will to a non-partner, as you cannot leave the same asset twice, so wills must be updated.
A written partnership agreement is a very creative document, and enables succession and future farming. Increasing diversification and non-farm income will mean they bring additional – and very valuable – inheritance tax benefits, as non-agricultural capital or ‘hope value’ for non-agricultural activity and residential properties which are not covered by Agricultural Property Relief.
A written partnership agreement with the related documents under the current rules gives you the best chance to claim the much more lucrative Business Property Relief in the event of a death.
Contact Simon Cunningham at simon.cunningham@ashtonslegal.co.uk or 07887 602112.
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