You will have heard over the years about the need to put partnership agreements in writing. In the absence of any agreement, the outcome is, in most cases, undesirable.
You need to consider how your will dovetails with your partnership agreement. A partnership agreement takes precedence over a will so if the latter is not written with the former in mind then there is every chance that an asset you wished to gift is not actually yours. A common error is to gift the farm, or individual parcels of land, under the terms of a will only to discover that, according to the partnership agreement and accounts, they are actually partnership assets which means that those assets cannot be gifted through a will.
HMRC are taking a closer look at what constitutes partnership property. The rate of relief for trading partnership property is potentially 100% on death or transfer, but only 50% for property owned by the partner and used in the business. If the evidence suggests that assets genuinely belong to the partnership looks insufficient, HMRC is unlikely to concede 100% relief immediately. After the death of a partner, they may want to scrutinise the partnership agreement to understand how the partnership assets are owned and the partners’ interest in them.
There are numerous cases of families forced to sell the family farm because there was no agreement in place to sort out who gets what in the event of a partnership being dissolved. In these circumstances, the only law that applies is the 1890 Partnership Act. The default position under the Act is that any of the partners can dissolve the partnership at any time and with no notice. The exit, death, or bankruptcy of any partner automatically dissolves the business and all the assets may have to be sold on the open market - and few farming families have the sort of cash in hand needed to purchase the deceased partner’s share. With a partnership agreement in place, arrangements can be put in place for the shares of a deceased partner to be bought in instalments over a defined period.
It is thought that only a minority of active farming partnerships have a written agreement. Without an agreement, the financial security and, by implication, the family is potentially compromised and tax planning opportunities missed. For this reason, wills and partnership agreements should be reviewed together, and on a regular basis.
By Partner, Ian McMurtry