Putting pen to paper is sometimes the hardest part of the partnership process, but it doesn’t have to be. Many partnerships operate on an unwritten agreement which means that they are open to falling into some unwanted traps and pitfalls when it comes to estate planning and the implications of the death of a partner. There are many benefits of having a written partnership agreement, which is reviewed on a regular basis.
Farmland and inheritance tax ("IHT")
Partnership agreements are important when considering whether land is held within the partnership. Normally, most of the land and buildings will qualify for Agricultural Property Relief ("APR") at 100%. Let land can also receive up to 100% APR depending on the terms of the lease. Beware – some environmental / natural capital schemes do not currently qualify as agricultural for these purposes.
The real area of importance is often the other land and buildings which are held by the partners or within the partnership e.g. development land or non-agricultural business assets. These assets may instead qualify for Business Property Relief ("BPR") but will only be entitled to 100% relief if they are partnership property and the whole partnership qualifies for BPR. Otherwise, where business assets are simply used by a partnership of which the owner is a partner, only 50% relief will apply. Having the position clearly set out in your partnership agreement removes any query as to the nature of these additional business assets or their status within the partnership.
Wills
The partnership agreement should have clear terms setting out what happens on the death of a partner. The default position, if not, is that the partnership is dissolved on the death. Furthermore, any provision for continuation of the partnership should work in tandem with the terms of the partners' wills to ensure that one does not inadvertently take precedence over the other, leading to unexpected consequences.
Legal rights
Following on from the importance of wills, comes the issue of legal rights. Legal rights are Scotland's form of forced heirship rules and can be claimed on the death of an individual by a surviving spouse or children. The claim can be made over the moveable estate only, which usually excludes land and buildings. However, as an interest in a partnership is moveable, bringing the land into a partnership can change its character from heritable to moveable, exposing it to a legal rights claim.
There are ways in which the partnership agreement can address this, by including bespoke drafting to cover the position, but each partnership should always be considered on its own circumstances as what is right for one may not be right for another.
Legal ownership of land
It is important to determine how title to land is held, as this can have an impact on the IHT relief available. If the farm has operated for several years, it may be that some of the land is held in the name of the partners as individuals and other parts of the land held within the partnership. Professional legal and tax advice should be taken to determine whether a formal conveyance to the partnership is the most appropriate option.
Separate Land Capital accounts
Lastly, it is important to consider including a land capital account within the partnership which reflects each individual partner's share in the land. This ensures that on death, in particular, it is clear who owns what and can help to avoid disputes later down the line.
The upsides to having a written farming partnership are clear. It is important to get professional advice early to ensure that the partnership agreement does exactly what you want it to do, and that you fully understand the tax and legal implications of your structure. Please do get in touch if you would like further advice on the options available to you.
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