Rural and Agricultural Property Partner, Jonathan Midgley, discussed the importance of recording farming partnership arrangements in writing.
It is still the case that a lot of family farming partnerships jog along in an informal way with no written agreement. The Partnership Act 1890 does not require one so the absence of one is not fatal, but it is a serious hindrance in many scenarios. For example if the partnership wishes to borrow, the bank will usually ask to see a partnership deed, and the absence of one may raise credibility issues which jeopardise the funding or even kill it.
The obvious advantages in having a written agreement include that it can deal with express understandings such as profit share, record who owns the land and in what proportions, provide authority for some or all partners to bind others, and set out exit terms and repayment of capital over time. There are many other reasons why a bespoke agreement covering the precise circumstances of the specific partnership is preferable to relying on an 1890 piece of legislation which even then couldn’t possibly fit all situations. Having a written agreement not only beefs up the credibility of the business, but may be critical in the tax-efficiency of the farming business, particularly in establishing the role of older partners, such as ageing parents. To be able to produce a partnership deed to HMRC clearly recording who the partners are and what arrangements are in place regarding the land (such as land-owning parents not being landlords but lending their land as part of the enterprise) may have advantages in capital tax planning.
A farming business partnership deed is not a silver bullet, but as part of a thought through range of proactive strategies it is most helpful in the smooth operation of the business, the securing of borrowing if it’s needed, and perhaps most importantly in tax-efficient estate planning.
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