Protecting the future of the business & the farm assets

We are in an increasingly litigious world with many more cases being brought to court over partnership disputes and inheritance claims. We are frequently asked to provide expert witness reports in these situations and most involve farming families whose businesses are reliant on the use of valuable property. Unfortunately, these cases prove to be very costly in court and professional fees in addition to the emotional stress on the family. One of the reasons they arise is because a suitable partnership agreement was not in place. Therefore reliance is placed on a 129-year-old Act, The Partnership Act 1890 (the Act), together with other evidence (including the partnership accounts).

Partnerships are the most common business structure within the farming industry - they are relatively simple and a flexible way to run a farming business. In our experience, most family farming partnerships operate without a formal partnership agreement. This is fine whilst everything runs well but trouble can arise when one partner leaves/dies or where one or more of the family don’t get on.

For example when a partner leaves, retires or dies there can be issues regarding the ownership of assets used by the partnership, the valuation of those assets and how the partner (or the partner’s beneficiaries) is paid out. If there is no written partnership agreement setting out how these issues should be dealt with, and the partners cannot reach an agreement, the partnership may be brought to an end by dissolving it. If this happens, then all the assets must be sold, debts paid off with the balance shared between the partners. There is no right for any partner to retain any of the assets.

It has been common practice to bring the farm property onto the partnership balance sheet to ensure inheritance tax reliefs are maximised. For example, non-agricultural property, such as rental, holiday letting, and livery properties, may not qualify for any inheritance tax relief outside a partnership. However, if these businesses are run within the farming partnership, and the property is owned by the partnership, 100% business property relief may be available. In doing this, care must be taken to ensure all the partners agree to this and how the property will be dealt with if one of the partners leaves or dies. Having this formally written in a partnership agreement will, not only protect the tax relief, but also help to ensure there are no disputes in the future.

Often the intention on death is for an individual to leave certain farm property to one of their children. For example there may be a rental cottage they wish to leave to one non-farming child and the remaining farm to the farming child. If this property is now partnership property they need to ensure their will and partnership agreement can deal effectively with this. If the will leaves the partnership share to one child and the cottage to another, it could be that the farming child ends up with the cottage, as it is part of the farming partnership capital. The non-farming child then receives nothing, leaving the two of them in dispute.

Iain McVicar reported on the case of Habberfield v Habberfield [2018] in our summer newsletter. Since then more farming inheritance claims have hit the press demonstrating the Courts ability to award claimants the entirety of the farm, where it is justified, with lump-sum payments to achieve clean breaks. Most inheritance claims arise after the death of party but more are arising in lifetime.

Expensive litigation can be avoided if the family’s professional advisors work together with the family to ensure the business and family have the suitable legal agreements in place and keep them under review. Further, to protect against future claims, it is important that the succession planning is understood by the family, as well as the advisors, and that this is supported by appropriate evidence. The professional costs of doing this vary depending on the circumstances but it will certainly be far lower than the costs of court proceedings in the event of a dispute.