Partners in general farming partnerships are increasingly being advised to introduce land into the partnership, if they have not already done so, usually as partnership capital, without any transfer of legal title from the landowners.
This has the adverse effect of restricting the freedom of the registered owners to deal with the land as they see fit. For instance, if you include specific assets, such as land, in a partnership without certain safeguards, you will not only be unable to bequeath those assets as you please under your will but you will also be unable to give those beneficiaries the right to occupy that land.
We have emphasised the importance of having formal partnership agreements in the past, particularly where the partnership assets include land and property. This is because, first, HMRC may require evidence in the form of a partnership agreement to prove that this is the case; and second, to record in writing the arrangement with respect to the land including how it is to be treated after your death.
Partnership may have to be dissolved to facilitate inheritance
On the death of a partner, unless the remaining partners and the personal representatives of the deceased agree otherwise, the deceased partner’s share (including the value of the land sitting against their capital account) will accrue in accordance with their will. The deceased partner’s share will become a debt owing by the remaining partners to the beneficiaries under the deceased partner’s will. The only way the beneficiaries can inherit their share is through the dissolution of the partnership, which is rarely desirable for the future health of the farming business. However, until the partnership is dissolved the beneficiaries will continue to be entitled to the deceased partner’s share of the partnership profits.
Include option to buy shares
To avoid this situation, we advise clients to include a clause in the partnership agreement which gives the other partners an option to buy those shares bequeathed to someone who is not a partner (often non-farming children). This provides the beneficiaries with the value straight away, rather than waiting for the partnership to be dissolved. Clearly, to exercise the option, the remaining partners need to be in a position to buy out the deceased partner – something which we often suggest can be resolved by paying in instalments.
Without including an option for your partners to buy your share, then the partnership may continue indefinitely and the beneficiaries of your estate may never receive their share.
Consider tax consequences of option to buy
Obviously every farming partnership is different and we strongly advise that any changes to a partnership agreements should only be undertaken with advice from your accountant, agent and, of course, your solicitor. Although a change may be legally possible, there may be adverse tax consequences so it is important that all your advisers work together when drafting (or amending) partnership agreements. A good (and particularly current) example of the importance of a coordinated approach is in the selling of land for development. In this situation, the existence of an option for your partners to buy your share in the event of your death could thwart any available tax savings. It is important to remember that a partnership agreement is a living document and should be reviewed regularly to ensure that any changes to the partners’ individual circumstances, or to those of the business, can be taken into account.
