FARMING PARTNERSHIP AGREEMENTS

Farming Partnership Agreements are legally binding documents that set out the ownership of farm business assets, and the responsibility, accountability and role of those partners within the farming business.

Why are they important?

Without a Partnership Agreement, a farming partnership (which is created automatically when 2 or more people decide to farm together to make a profit) is regulated by the Partnership Act 1890.

This isn’t ideal, as it automatically gives all partners equal voting rights, equal accountability for profits and losses, and equal shares of the profits. If a partner dies, the partnership must dissolve, and this can have negative tax implications. And if a new partner wishes to enter, consent must be unanimous.

Each family farming business is unique, and the nature of how partners often work and live side-by-side, along with their emotional attachment to the land, can cause stress and disputes. Therefore, a Farming Partnership Agreement is almost essential.

Considerations for a Farming Partnership Agreement

Tax

It’s essential to state clearly whether land and buildings are owned by the Partnership or by an individual. Including them on your business balance sheet is no longer enough. It could mean the difference between being eligible for 100% Business Property Relief and 50% Relief on the death of a partner with regard to Inheritance Tax. This article explains more about how a Farming Partnership Agreement can reduce Inheritance Tax liabilities.

Death of a Partner

Without an agreement, the personal representatives of the deceased partner can wind up the partnership once it has automatically dissolved, and demand the sale of the assets. This obviously leaves remaining partners in a very difficult situation.

An agreement can set out how shares are to be transferred, to whom, and what their value is, on the death of a partner. Click here for further information.

Profit and Loss

The agreement must set out how profits and losses are to be shared. Without one, they will be shared equally, which may be looked upon very unfavourably by a partner who has contributed more money to the running of the business.

New or Retiring Partners

Consider what might happen in the event of a marriage, divorce, retirement or serous illness.

With an agreement, the introduction of a new partner needs unanimous consent. And a partner cannot be expelled without dissolving the partnership. An agreement should contain clear, procedural instructions for any of these life events.

For further considerations, click here

How to create a Farming Partnership Agreement

Basic templates are available online, but they often come with hidden costs, and their generic nature might not be fully appropriate for your complex business.

Seeking legal advice might seem expensive, but it will potentially save you a lot of money and stress, and many solicitors offer a free, no obligation initial chat, and will outline likely costs before you begin the process.

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