The Importance of Farming Partnership Agreements

Just as important as an understanding of the total value of your estate when undertaking IHT planning, is an understanding of certain legalities. We thank Jeanette Dennis and Fenella Eddell of Ashtons Legal LLP for sharing their wisdom on farming partnership agreements with us. Whilst we have concentrated on partnership agreements, it should be noted that a shareholder’s agreement in a company setup will be of similar importance.

For some, a partnership agreement is something which has not had much thought given to it. You can trade in partnership without one, but in doing so you are automatically governed by the Partnership Act of 1890.

Things have changed a lot since 1990, let alone 1890, and perhaps the biggest issue facing anyone trading in partnership without a formal agreement is that under the 1890 Act the partnership immediately ceases at law if a partner dies. This can have huge knock-on effects in an already difficult time, with bank accounts being frozen when trying to make payments to suppliers or employees, or simply from receiving funds from customers. A good partnership agreement will ensure the continuation of said partnership, as long as there are a sufficient number of partners.

It should also set out any property which comes within the wrapper of the partnership, known as partnership property. This is property (land and buildings) that is used within the farming partnership but does not have to be owned by all the partners, or in equal proportions. An appendix to the partnership agreement, or a separate “declaration of trust” document, can be a great way to confirm what is partnership property and to firm up evidence for any future APR or BPR claim for IHT purposes.

Other key aspects of a partnership agreement are setting out profit and loss sharing ratios (which can be flexible to help with individual partner’s Income Tax planning), what the partners can and cannot do, and the process for any decision making, particularly if there isn’t a majority vote. There are many other areas that a partnership agreement can cover, but any agreement should fundamentally be tailored and unique to each business and family circumstances.

Finally, once a partnership agreement is in place, or alongside the preparation of this, any Wills should be reviewed or drafted. One incredibly important feature of a partnership agreement is that it can (and will) override a Will, especially in relation partnership assets. These therefore need to be aligned so that there is no mismatch in wishes.

Get In Touch

For more information or advice on Farming Partnership Agreements, get in touch with your usual Whitings contact, your local Whitings LLP office or Ashtons Legal LLP today.