The importance of Partnership Agreements when considering Succession

Succession and estate planning for farmers is complex, with many issues to consider including balancing the sustainability of the farm and protecting family members whom have worked on the farm all their life whilst ensuring that those that haven’t are also treated fairly.

Many feel that the first stage is to prepare a will and this is, undoubtedly, important. However, for farming families, the considerations need to be far wider.

It is often the case that Partnership Agreements contradict provisions made in a will. Historically, Partnership Agreements provide for partnership assets to pass equally or proportionately to the surviving partners with no or minimal payment, whilst the will provides differently. This, undoubtedly, causes uncertainty, but more worryingly lends itself to a family dispute which is often lengthy, expensive, and irreparable.

It is also important to ensure that full accounts are prepared with separate capital accounts for the business’ assets. Again, historically, Partnership Agreements often provide for initial capital introduced into the business but are not always updated when land is inherited or purchased. This can cause further complications of whether that land is then regarded as a partnership asset or not and the implications, thereof, for both taxation and succession.

Often, Partnership Accounts are used to ascertain whether that land is an asset of the partnership or whether it is just used by the partnership. It is widely known that there are valuable taxation reliefs available to farmers; Partnership assets can be eligible for 100% business property relief whereas assets used by the partnership, but owned personally, may only attract 50% relief.

The importance can be seen of ensuring that the assets are regarded as partnership assets and that these are reflected in both accounts and any partnership agreement with such agreements being updated regularly.

There have been many cases heard in court ascertaining the position of whether assets form part of the business and pass in accordance with the Partnership Agreement, or part of the deceased’s estate and pass according to their will, but of course it isn’t only death upon which this impacts; divorcing farmers often have the same issues to resolve!

The position is the same for limited companies and shareholders’ agreements.

Our advice is any business arrangements and succession should be reviewed regularly with your accountant and lawyer to ensure that wishes can be met, and your family is protected which ensures the business remains viable.