You should review your Partnership Agreement regularly (every 3-5 years) and particularly in the event of any major life changes (or anticipated changes). Consult your solicitor to see whether there have been any changes to legal or tax requirements since the previous review. Consider whether wills and accounts still reflect the position set out in the Partnership Agreement.
Please note the following scenarios address certain common pitfalls but do not constitute legal advice. Where you have concerns about farming partnerships or succession planning you should take independent legal advice at the earliest opportunity.
What is Partnership Property?
Mr and Mrs Farmer and their two sons are in partnership and operating the farming business.
Mrs Farmer dies unexpectedly and the only child who is not involved in the farming business decides to claim his legal rights. In Scotland, legal rights can only be claimed in respect of moveable property – generally everything but land and buildings.
The title to the farm is held in the name of Mr and Mrs Farmer as individuals but on further investigation it transpires that the Farm is entered on the balance sheet in the firm’s accounts, so Mr and Mrs Farmer in effect hold the land (and any buildings) as trustees for the firm, which makes the land partnership property.
As the heritable property is effectively partnership property, it is deemed to be movable property and becomes part of the assets subject to the calculation of the legal rights claim. This could have the effect that part of the heritable property must be sold to settle the legal rights claim if there is insufficient cash or other assets to pay it out of the remainder of the deceased’s estate.
How to avoid
- If there is likely to be a legal rights issue with children who are not partners, try to avoid holding the heritable property on the balance sheet.
- Make it clear in the Partnership Agreement what (if any) land is partnership property - and include details to identify that land, not just a valuation figure.
- Include an express clause in the Partnership Agreement that the heritable property is not partnership property and disapply s 22 of the Partnership Act 1890. This approach has not been tested in Court yet but arguably makes the parties’ intentions clear.
- In practical terms consider other options to compensate children who are not involved in the business – a specific legacy of other assets (e.g. residential property not used for the farming business or other investments of the individual partners, diversified on-farm projects, or a specific insurance policy).
- Check that the position of the legal title to the land matches the provisions of the Partnership Agreement and the partners’ wills also reflect the same position to avoid later dispute.
- Bear in mind that the heritable/moveable property issue also applies where the heritable property is owned by a Company and all that the individual owns is a shareholding in the Company.
- Bear in mind that in the event of any partner getting divorced, the question as to whether heritable property is partnership property or not can also have effect on the treatment of that asset and whether it is considered to be matrimonial property (as set out in the Family Law (Scotland) Act 1985).
Who occupies the Farmhouse and why is it important?
Mr and Mrs Farmer have retired and handed over the farming business to their son, who assumed his wife as a partner when his parents resigned as partners and trustees of the firm. Mr and Mrs Farmer continue to occupy the Farmhouse.
Assets used for the purposes of agriculture can benefit from valuable reliefs from Inheritance Tax (IHT) including Agricultural Property Relief (APR). However, the farmhouse requires to be occupied by an active farmer to qualify for APR. It is therefore important to be able to demonstrate that the land owner remained an active farmer -which does not necessarily require driving a tractor! As Mr and Mrs Farmer have now retired, they are no longer active farmers.
How to avoid
Ensure that the farmhouse remains occupied by an active farmer.
- Keep Mr and Mrs Farmer in the partnership but with a reduced interest and ensure there are minutes of meetings documenting their continued involvement in decision making which take place at the farmhouse.
- Alternatively, Mr and Mrs Farmer could move to alternative accommodation.
Who is in control of the decisions concerning the business?
Mr and Mrs Farmer decide that rather than assuming any other partners into the firm they intend to give up farming. They retire and enter what they consider to be a Contract Farming Agreement (CFA) with a neighbour. Nothing is written down.
If a suitable written agreement is not in place, it may be that the arrangement is deemed to be a lease, rather than a CFA. This can have implications for the value of the property and for the recovery of possession.
Longer term, for the Farmhouse to be eligible for APR on the death of an owner, as mentioned above it must have been occupied by an active farmer.
If there is no record of involvement by Mr and Mrs Farmer, the land owner, in the day to day business operations under the CFA, it is likely that the farmhouse will no longer meet the qualifying requirements for APR.
How to avoid
- Ensure any CFA is in writing and provides that the land owner is to remain actively involved.
- Document minutes of meetings regarding the CFA taking place at the farmhouse.
When considering your succession planning prepare and provide for:
Has this article prompted questions for your own situation?