The importance of a partnership agreement for farming families

With ongoing reforms to inheritance tax and uncertainty generally around the agricultural sector, a formal, family farming partnership agreement has never been more important. Jack Peart, Associate in Coodes’ Corporate and Commercial team, together with Fleur Uren, Solicitor in Coodes’ Commercial Disputes team, explains just why these agreements are so vital.

The Partnership Act 1890 (the Act)

In the absence of a formal written farming partnership agreement, the archaic Partnership Act 1890 still governs the relationships of the family partners and is rather a blunt instrument. That’s why a well-drafted partnership agreement is crucial for protecting the business assets of a farming family.

Under the Act, on the death of any one partner, the partnership is dissolved unless any agreement states otherwise. This brings about its own economic, commercial (think cattle keepers) and day-to-day challenges in what will already be a time of major upheaval and uncertainty.

Family farming partnership agreements

No farm partnership agreement is the same. For each family, the agreement should be tailored to the specific circumstances of the farming family. It should address the specific tasks to be undertaken by certain partners as well as the profit or salary for undertaking such a role. This includes discussing the share split percentages as to capital in terms, both general and property potential where the farm is an asset of the partnership balance sheet. In addition, discuss the day-to-day activities, provisions where unanimous consent for the partners is needed and any formal business plan or strategy that may be needed.

The partnership agreement should also include provisions for the transition of shares upon the death of a partner. Alternatively, it should include general restrictions as to what can happen with a partner’s interest upon death. Agreements often allow for options to purchase, gift over on death or a retirement of the partner’s interest, the aim being to allow the partnership to continue to exist and not restructure, sell or re-mortgage the partnership.

When implementing a partnership agreement to include these provisions, it may be necessary to review any wills or wishes each partner has in place currently to ensure the wishes align and work.

Inheritance tax (IHT) planning

Partnerships are treated as transparent for tax purposes, meaning each partner is responsible for their own individual returns and taxes. This means a partner could be liable for income tax, capital gains tax and IHT at any point in time.

Having a partnership agreement in place may help with tax planning for various eventualities during the lifetime of a partnership. This point has never been so important, particularly to show who has an interest in the various capital assets, including the land, when planning from an IHT perspective.

Avoiding a dispute

Without a written partnership agreement to regulate the relationship between partners, matters can quickly escalate into a dispute. Partnership disputes often centre around the ownership of partnership assets or how the partnership will be dealt with upon death or dissolution and this ambiguity often results in lengthy and costly litigation. More particularly, in relation to family farm partnerships, disputes can arise following the breakdown of a marriage where no specific provision is provided for in relation to partnership assets and the entitlement to partnership profits.  

The outcome of these disputes can sometimes lead to an end result that does not necessarily reflect the original intention of the partners as in the absence of a written agreement, the Act will apply. Certain provisions in the Act are not suitable for farming partnerships and can lead to uncertainty for the continuity of a farming partnership.

Drafting a farm partnership agreement

A well-drafted farm partnership agreement is essential for a farming family to protect business assets, ensure smooth transition of shares and prevent undesirable dissolution and winding up. By addressing these key legal issues, the agreement can help secure the continuity and long-term success of the farming business.

If your family does not yet have a partnership agreement in place, or is in the process of considering an update, don’t hesitate to contact Jack Peart by emailing jack.peart@coodes.co.uk or calling 01872 246215. Alternatively, you can fill in our online contact form here.