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Don’t write your will without your partnership agreement to hand

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Posted by Katie Alsop on 19 May 2017

Katie Alsop - Will Disputes Lawyer
Katie Alsop Partner

We have written extensively over the years about the need to put partnership agreements in writing. Agreements created verbally, or through the conduct of the parties, do carry legal weight but, in the event of a disagreement, resolution often comes down to who said what which is notoriously unreliable and can cause even greater upset.

In the absence of any agreement, the 1890 Partnership Act will determine what happens to the partnership – the outcome of which is, in most cases, undesirable. 

Understand what you own and what the partnership owns

However, you should also consider how your will dovetails with your partnership agreement. A partnership agreement takes precedence over a will so if the latter is not written with the former in mind then there is every chance that an asset you wished to gift is not actually yours – it belongs to the partnership. A common error is to gift the farm, or individual parcels of land, under the terms of a will only to discover that, according to the partnership agreement and accounts, they are actually partnership assets which means that those assets cannot be gifted through a will. Drafting your will with the partnership agreement to hand means that you will know exactly which assets are personal and which belong to the partnership. It is important to understand that holding the legal title of a property at the Land Registry does not necessarily mean that the property is yours as you could hold it on trust for the partnership.

Greater HMRC scrutiny of partnership property

HMRC appears to be taking a closer look at what constitutes partnership property. The rate of relief for trading partnership property is potentially 100% on death or transfer, but only 50% for property owned by the partner and used in the business. If the evidence that assets genuinely belong to the partnership looks insufficient, HMRC is unlikely to concede 100% relief immediately. After the death of a partner, they may want to scrutinise the partnership agreement to understand how the partnership assets are owned and the partners’ interest in them.

There are several reasons why it is more important than ever for farming partnerships to try and take full advantage of 100% business property relief: the increase in land prices; new income streams generated by diversification of farm businesses; and higher potential development or hope value.

Not giving a partner the right to withdraw a previously owned asset from the partnership (or the entitlement to the whole of any income due from it) can help to avoid potential problems. Land held in a partnership should be registered in the names of all the partners or, failing that, a declaration of trust completed stating that the partner is holding it on behalf of the partnership.

Generally, partners should understand that if they transfer land to a partnership, it is no longer theirs to deal with as they wish; what they own within a partnership agreement is their interest in the partnership and not the underlying assets. If the partners agree that the land held in the partnership is done so other than in accordance with the partnership capital sharing ratios, this arrangement should be formalised in a partnership agreement.

1890 Partnership Act

There are numerous cases of families forced to sell the family farm because there was no agreement in place to sort out who gets what in the event of a partnership being dissolved. In these circumstances, the only law that applies is the 1890 Partnership Act. The default position under the Act is that any of the partners can dissolve the partnership at any time and with no notice. The exit, death, or bankruptcy of any partner automatically dissolves the business and all the assets may have to be sold on the open market - and few farming families have the sort of cash in hand needed to purchase the deceased partner’s share. With a partnership agreement in place, arrangements can be put in place for the shares of a deceased partner to be bought in instalments over a defined period. 

Keep partnership agreements and wills under regular review

It is estimated that only a third of active farming partnerships have a written agreement. Without an agreement, the financial security of those businesses and, by implication, the family is potentially compromised and tax planning opportunities missed. For this reason, wills and partnership agreements should be reviewed together, and on a regular basis. Otherwise you run the risk of not being able to bequeath assets as you wish and the tax position will also be less than ideal. If you would like to review either your existing agreement or discuss drawing up a new one in tandem with your will, then please get in touch and we would be delighted to help.

This article is included in our Law and Land magazine; spring/summer 2017 edition. 

About the author

Katie specialises in contested wills, disputed estates and the removal and substitution of executors.

Katie Alsop

Katie specialises in contested wills, disputed estates and the removal and substitution of executors.

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