The UK Farming Industry has seen a significant increase in the number of farmers entering into partnerships in the guise of joint ventures, mergers and traditional general partnerships. General partnerships (governed by the Partnership Act 1890) continue to be the chosen structure and is an established way for farmers to share resources and expertise, benefit from tax reliefs, access markets to improve operations and increase profitability and assist with succession planning.
Topics to be answered in this article
What is a farming partnership agreement?
A partnership is automatically formed when two or more people decide to farm together. A Farming Partnership Agreement is an official document that establishes the ownership of assets, business roles and many other matters as listed below. It is becoming increasingly common for banks and lenders to require a formal partnership agreement to be in place for a business loan request.
What should the Partnership Agreement deal with?
Partnerships can be complex depending on the scope. The Agreement can cover many matters such as:
- Management of the business
- Detailing the interests held by each partner
- Introduction of capital
- The withdrawal of capital
- The roles and obligations assigned to each partner
- Ownership of assets
- Drawings and distributions
- Dispute resolution
- Dealing with retirement
- Ill health or death of a partner
- Succession planning and passing the business on for future generations
What are the benefits of a Partnership Agreement?
There are many benefits of putting a Partnership Agreement in place.
Income splitting: Farmers can split their income with their fellow partners in a manner that is most tax efficient for the business and the individual partners
Tax Planning: With the assistance of advice from a tax adviser, a partnership can structure the ownership of assets, the trading business of the farm and the disposal of assets to ensure available reliefs and tax breaks are utilised.
Business Property Relief and Agricultural Property Relief: This is known as BPR and APR. These are important reliefs to a farming business. Certain criteria are taken into account when addressing the market value of certain assets at the time of a disposal or deemed disposal of certain assets. The Partnership need to have sufficient evidence at the relevant time as to the use and legal (and beneficial) ownership of the relevant asset(s). It is therefore beneficial for property to be formally recorded as being held by the Partnership (legally) and to be recorded as such on the balance sheet.
Depreciation: Farmers can claim depreciation of the assets such as equipment, vehicles or buildings, to help reduce the overall cost of these assets and their impact on the farm business profits.
Losses: The losses within a Partnership can be shared in accordance with the sharing of profits or in whatever share is agreed by the partners. The offsetting of losses in different proportions can be beneficial for tac planning.
Eligibility assistance: Certain tax reliefs, finance options or grants may be more easily accessible for farmers that have formed a Partnership. For example, Government schemes may be more tailored towards farming operations of a certain size or scale and Partnerships can help farmers evidence that they meet certain criteria.
Succession Planning: Succession Planning remains the buzz word in 2023 and continues to affect farming partnerships. The lack of good succession planning can cripple what was one a successful business. The Partnership Agreement can provide a source of clarity for the succession plan of the farm business and provide a tax planning mechanism to assist with Inheritance Tax liabilities.
How can Goughs help?
At Goughs, we recognise that your farm business may span many generations and we will work closely with you to understand the past, present and future direction of your farm business. We have all of the expertise needed to assist you with the preparation of the Partnership Agreement, whilst working collaboratively with your chosen Accountant and Tax Adviser to find the right fit for your farm business and family.
Please get in touch to discuss your requirements, and how we can apply our knowledge to assist you in meeting your objectives in passing on your estate without fuss or fanfare.