Many farming businesses are operated as partnerships, but it is still common to find that farmers do not have a full understanding of the benefits of a written farming partnership agreement. Julie Liddle explains why signing on the dotted line can have far reaching positive consequences.
It’s common to find UK farms operated as partnerships, frequently seeing family members joining the partnership as children become part of the business.
Despite this, many farmers have not made use of a farming partnership agreement, or the agreement they do rely upon is out-of-date.
Unfortunately, this can result in challenges for the business and those that operate it if circumstances change. The famous case of Ham v Ham & Anor highlighted that conflicts among partners can even result in the family business needing to be sold off.
Why is it important to have a farming partnership agreement?
There are a surprising number of situations which can arise to cause disputes among partners if this document has not been drawn up.
Circumstances can change all the time – a partner can retire or die, there may be a need for a new partner to be introduced to the business, or one partner may wish to ‘cash out’ altogether.
Without the existence of a farming partnership agreement, such disputes are settled under the provisions of the Partnership Act 1980, which may lead to an unexpected or unwanted outcome.
What will a partnership agreement help with?
There are many issues that can be covered by an agreement. These include:
- The length of the partnership and the type, e.g. limited liability
- How the partnership can be dissolved and what happens to assets afterwards
- What the assets are – for instance, should the farmhouse be treated as an asset
- Who the partners are, and how a new partner can be brought into the fold
- The rights and duties of each partner
- Plans for tax mitigation
- How should decisions be made by the partners
- What happens on the death or retirement of one of the partners.
- How can shares be bought out of the business
What should be done once the agreement has been drawn up?
Just like a Will, partnership agreements can quickly go out-of-date with time, particularly if personal circumstances change for one of the partners.
As a result, it is vital to keep reviewing the partnership agreement as often as once a year (especially if one of the partners is elderly) or at least every three to five years.
Marriage, divorce, death, retirement, birth of children; there are many developments which can render a partnership agreement as dated and not offering the protection – financial and otherwise – that it was aiming for.
Among the largest of changes, the introduction of a new partner can take time and money depending on circumstances – HMRC must be notified, re-mortgages and valuations may be needed, and tax advice sought.
Sometimes, if there are only two partners, the death of a partner can often bring the arrangement to a close. Even if it doesn’t, the partnership agreement should set out what happens to the deceased’s share, how it should be valued and whether it can be bought by the surviving partners.
It is just as important, if not more so once a partnership agreement exists – to keep any Wills up-to-date. This is to reflect changes in the dependants’ situation.
There are many positives to going into business as a partnership, but also plenty of issues to consider before doing so.
For advice on any rural land and property issues, call Julie on 01768 254 354.