Form agreeable partnerships to ensure your farm is in safe hands

Shepherd and Wedderburn appointment Gillian Campbell to the team

ABERDEEN, SCOTLAND - MARCH 27, 2019: Shepherd and Wedderburn is a Scottish-headquartered UK law firm. From offices in Edinburgh, Glasgow, Aberdeen and the City of London, the firm delivers comprehensive multi-jurisdictional legal advice across every business sector as well as offering the full range of private client services. Gillian Campbell at the Aberdeen Office.


(Photo by Ross Johnston/Newsline Media)
Shepherd and Wedderburn appointment Gillian Campbell to the team ABERDEEN, SCOTLAND - MARCH 27, 2019: Shepherd and Wedderburn is a Scottish-headquartered UK law firm. From offices in Edinburgh, Glasgow, Aberdeen and the City of London, the firm delivers comprehensive multi-jurisdictional legal advice across every business sector as well as offering the full range of private client services. Gillian Campbell at the Aberdeen Office. (Photo by Ross Johnston/Newsline Media)

Although farms run as a family business tend to follow a partnership structure, those running such businesses are often reluctant to commit to paper the terms of the partnership or to keep the terms of an existing agreement up to date.

This can create significant problems when it comes to succession and tax planning, and potentially give rise to disputes between partners in the business that could jeopardise its future.

Farming businesses can adopt several different business structures. They often start out as a sole trading business, but as time goes by other family members may be included to form a farming partnership. At this stage, as all the partners are from one family, they are often not inclined to enter into a written partnership agreement. Legally, there is no requirement to put in place a written agreement, but if you do not then the provisions of the Partnership Act 1890 will apply by default. A number of these are potentially unsuitable, such as those relating to the division of profits, as well as those requiring the automatic dissolution of the partnership in the event of a partner’s death or retirement.

A dispute between partners could have potentially far-reaching consequences for the continuity of the farm business. However, this can be avoided by having an agreement that is well written and provides certainty over partnership issues.

Such an agreement will usually:

l specify the name of the firm;

l specify the duration of the partnership;

• state initial capital contributions;

• regulate the division of profits and losses;

• provide for keeping accounts;

• specify the management structure and duties of the respective partners;

• envisage events of retirement, death, dissolution, arbitration, expulsion etc.; and

• identify partnership assets and personal assets.

It is important that these provisions are kept up to date. An agreement that has been ignored when, for example, partnership accounts have been produced, may simply lead to confusion and ultimately cost in the event of a future disagreement.

The provisions of the partnership agreement applying on death may also override the terms of a will when it comes to dealing with a deceased partner’s interest. For this reason, it is essential that any partnership agreement and the wills of each of the partners complement each other. The relevant provisions should be understood by all partners and kept under review. Although sometimes it may be difficult for all partners to reach agreement on a particular issue, it is better to try to resolve the matter sooner rather than later, otherwise problems are simply being stored up for the future. If a provision is unsuitable then, while renegotiating it may be difficult, ignoring the issue could lead to major problems in the long term.

Partnerships can also be an important inheritance tax planning tool. The two main inheritance tax reliefs to which farmers may be entitled are agricultural property relief (APR) and business property relief (BPR).

For most farming partnerships, land and buildings will qualify for APR at 100%. In many cases, this will remove inheritance tax as a concern. However, APR will not apply to certain assets, such as surplus let cottages. It will also not apply to the non-agricultural value of development land.

In these cases, the availability of BPR is very important, but this will only apply at 100% if an asset is “partnership property”. Given that a large amount of money may be at stake, it is prudent to ensure that matters such as the ownership of partnership assets is clear.

While the availability of BPR may point towards all assets being made partnership property, there are other matters to consider such as whether “legal rights” are an issue in the family. Legal rights is a Scottish doctrine that entitles children to claim a share of the moveable estate of a deceased parent. Another issue that needs to be considered is how such assets will be treated in the firm’s accounts.

At Shepherd and Wedderburn we act for a large number of farming partnerships, regularly revising existing partnership agreements and drafting new agreements where necessary. We can also advise on related tax and succession issues, and provide support if there is a dispute among partners. It is worth remembering that, by taking legal advice at an early stage and drafting a clear partnership agreement, many costly and potentially damaging issues can be avoided.


For more information, contact Gillian on 01224 343549 or at gillian.campbell@shepwedd.com

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