2 October 2012

To be or not to be a partnership asset… 100% business property relief is the question

Dawn Oliver, Partner, offers her views on partnerships and the joint ownership of property.

“I will start with an apology to the Bard himself but it is an important question that farmers need to consider when carrying out a review of their affairs and looking at potential inheritance tax liabilities on their death.

As a solicitor with more than 20 years experience of advising farmers and business owners in relation to these matters, I am often surprised at the number of clients who think that because an asset that would otherwise not qualify for Agricultural Property Relief (APR) is “owned” by the farming partnership, they mistakenly believe that it would not suffer an inheritance tax liability on their death.

In an era of increasing diversification in the farming world, the recent case of Balfour (Earl of) –v- HMRC (2010), demonstrated the importance of Business Property Relief (BPR) where significant rental properties were owned as an investment business, which had been integrated over the years into the main trading business.

Often in these cases the value of investment property can be high and there is a large amount of inheritance tax relief at risk. The same is true in relation to the importance of BPR for development land as the hope value (the difference between market value and agricultural value) can often be significant. In these cases quite simply the application of APR is not enough and BPR will be needed to shelter the additional value to avoid paying inheritance tax.

Even where non farming assets are included on the partnership balance sheet, there is still a need to prove that these are truly business assets and HMRC have been known to take a tough line with these arguments. Further still, a number of farming partnerships operate without a written partnership agreement or inadequate documents. Whilst it is important to set out the terms upon which the partners agree to carry on the business together, a properly drafted agreement should go beyond such matters as profit sharing, for example to specify what should happen in the future if there is a dispute or a partner leaves or dies.

This can have far reaching consequences where in the event of his death a partner would want to make arrangements which require the surviving partners to buy his share of the partnership. This can result in the loss of BPR even if HMRC agree the assets qualify. This is always the case where there is a binding contract for sale and it is important to ensure that there is no such purchase obligation in the partnership agreement or elsewhere. The arrangement must be expressed to be “an option” to buy the deceased’s partners interest in the business.

You might be wondering why as a solicitor who drafts Wills I seem to know so much about farming partnerships? Quite simply the two can never be mutually exclusive. One without the other is like Romeo without Juliet. A properly prepared partnership agreement needs to be supplemented by an appropriate Will for each partner drafted by a solicitor who understands and considers both.”

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About the Author
Dawn Oliver, Partner, Head of Wills, Trusts and Estates
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