Partnerships are common in the farming industry, offering farmers a variety of benefits such as additional resources and tax relief. If you have a farming partnership, a formal agreement is essential for ensuring its long-term success.
Despite farming partnerships being relatively common, many partners have no written agreement in place. One of the main reasons is that partnerships are often established within farming families, with the assumption that a formal agreement is unnecessary between relatives.
Whether your business partner is family or not, every farming partnership should have a well-drafted, written agreement in place to protect the interests of all involved.
What is a farming partnership?
A partnership is formed when two or more people decide to start a farming business together. Farming partnerships are beneficial to farmers for a number of reasons including greater resources, increased efficiency and tax relief.
Partnership agreements and why they matter
Although no written agreement is required to create a partnership, an official document clearly defines the conditions of the partnership and therefore mutually benefits all partners. Once established, the agreement should be reviewed regularly to ensure the information remains accurate and up to date.
Having a partnership agreement in place reduces the likelihood of disputes by ensuring that each partner has a clear understanding of ownership, assets and profit sharing. In the event that a dispute does occur, a structured plan determined within the partnership agreement will ensure a swift and timely resolution for everyone.
It is also becoming more common for banks and other lenders to require a formal farming partnership agreement prior to approving a business loan request.
In the absence of a written agreement, the future of your farming partnership is determined by the Partnership Act 1890 and its legislation is largely outdated for modern farming. Most notably, if a partner dies, the partnership will be automatically dissolved, leaving the remaining partner/s being required by law to settle all debts and repay any outstanding loans.
Business Property Relief (BPR) – which assets qualify?
Any farm partnership that is mainly trading and involves partnership property may be able to claim Business Property Relief (BPR). Property within the partnership is eligible for 100% tax relief, while personally owned property is only eligible for 50% even if it is used within the farming trade of the partnership.
Relying on Agricultural Property Relief is not a wise idea, as the relief only applies to assets used for agricultural purposes and covers their agricultural value rather than their market value. Recording the property in your annual accounts is also not sufficient to demonstrate that it falls under partnership ownership (but this does help).
The only effective method for preventing a relief challenge from HMRC is to provide documented evidence of the ownership, which can be facilitated through a partnership agreement.
What to include in a partnership agreement (amongst other things)
- A complete list of all assets involved in the partnership and the capital ownership of them – this is normally done using the land and other capital accounts within the partnership
- Clear notes of how capital profits and losses on any sales of land will be dealt with
- Detailed information on how income profits will be shared within the partnership and when these can be drawn on
- A contingency plan detailing what should happen if one partner leaves the partnership or dies or if the partnership needs to be dissolved in the future
- Details of how bank accounts, borrowing or lending etc should be managed and how many partners must agree before certain sums are committed to
- Details of how any disputes should be resolved
If you are part of farming partnership or planning to enter one, you should seek legal advice to obtain a written partnership agreement that is tailored to both you and your business requirements.
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