Ham illustrates that robust legal agreements are a necessity so as to avoid disputes and estate planning is a must, to protect tax reliefs, says Julie Butler, partner at Butler & Co
Claiming business property tax relief
As HMRC reclassifies trading businesses as investment businesses, claims for business property relief (BPR) will be at risk, warns Julie Butler, as the tax authorities can look to collect more IHT
With farmland prices having ‘rocketed’ upwards in value in the last decade and development potential returning through changes to planning regulations in 2013 and 2014, there is greater need to protect the land values from dispute and death duties.
It is understood that despite these realistic worries very few farming partnerships have undertaken the work and expense of an up-to-date, well thought through partnership agreement. The problems with the lack of partnership agreements were emphasised in a recent case Ham v Ham.
Facts of the Ham case
Mr Ron and Mrs Jean Ham, husband and wife, started their farming business in 1966 with a modest five-hectare plot, and continued growing the business from this time onwards. Lower West Barn Farm, Frome (95 hectares) was purchased in 1986. John Ham (son) joined the farming partnership on 1 October 1997, when the family farm in Frome covered 178 hectares.
Ham Senior described the farm as his ‘only source of income’ and his ‘legacy to the children’. He hoped that one day John would take over the running of the farm. John Ham joined the farm aged 19, and worked with ‘youth and vigour’ for the next 11 years to 2009. In 2009, the three way partnership began to unravel. John wanted to drive the farm in one direction, and his parents (aged at this stage in their early 70s) disagreed and refused to relinquish control. John then ‘retired’ from the partnership on 27 February 2009, citing irreconcilable differences with his parents.
How many farming partnerships are there across the UK where there are differences that cannot be resolved? Likewise how often does one find in the farming industry that the partnership agreement does not provide help, or indeed there is no partnership agreement?
Ham is a case amongst many current farming disputes and legal cases which show that it is imperative to have a strong and robust agreement in place.
The inadequate partnership agreement
In the Ham case, per the terms of the partnership agreement, the other partners would buy out the leaving partner after three months notice of the intention to quit. It is here that there was the key dispute over the value of the buyout:
a) John felt he was entitled to a share of a full market value of the farm, whereas
b) Mr and Mrs Ham argued that their son’s share should be assessed on the book value of the assets – a far more meagre payout as it ignores the soaring land values
It would appear that the dispute occurred because of the poorly worded partnership agreement – what value John was entitled to was a matter of interpretation, rather than a clear defined value or basis of calculation specified in the original 1997 partnership agreement. One of the Appeal Court judges expressed sadness that a lack of clarity in the agreement’s drafting had caused so much ‘anxiety and expense’ to the family.
Sadness at the ‘anxiety and expense’ to the family
With so much at stake why are quality partnership agreements avoided by farming families? The cost? The problems of facing very difficult decisions? The sad point of this case is that the parents will only be able to afford the payout by selling, thus breaking up the farm.
The initial court hearing was at Bristol County Court in March 2013. HHJ McCahill QC, presiding, decided that, as a matter of interpretation of the partnership deed, John’s share was to be determined on the same basis as annual accounts were drawn during the continuation of the partnership, rather than on the basis of an up-to-date market valuation of the partnership assets.
Historic Cost or Market Value?
What is the basis under which partners should be paid out – historic or market value? John appealed this decision and the case went before the Appeals Court in London in October 2013. On Wednesday 30 October 2013, the three judges ruled that ‘John was legally in the right and that his parents must be held to the bargain they struck with him 15 years ago’.
Lord Justice Lewison said ‘I reach this conclusion with some reluctance because, on the particular facts, it may be thought that John will receive a substantial windfall’. The other two judges also expressed sympathy to Mr and Mrs Ham Senior, but concluded that John was entitled to make a market value claim.
Could it be that a badly drafted agreement will result in such a windfall?
Against the background of the farming industry at last realising that they need robust legal agreements to avoid disputes and estate planning to protect tax reliefs, there is the shadow of the “active farmer” rules. At the time of writing, the news of the final active farmer rules is still outstanding. There will be need for some restructuring to ensure the compliant claimant and for the farming industry this will tie into the work to try and ensure there are well-drafted partnership agreements.
Tax importance of the partnership agreement
The potential for dispute among farming families is not the only reason for a well-drafted agreement. There is also the need to identify what is ‘personal’ property and what is ‘partnership’ property for the availability of 100% as opposed to 50% business property relief (BPR). The tax facts are straightforward – farmland made available to a partnership only achieves 50% BPR whereas ‘partnership’ property achieves 100% BPR.
Farms need BPR to protectvisers
- Ensure there is a robust updated partnership agreement in place from the commencement of every farming partnership
- Review all so much of the farm. Examples are development and amenity value, non-agricultural activities, cottages etc.
Action plan for adpartnership agreements, and ensure clarity has been achieved – the whole Ham case was triggered because the deed of partnership was not clear on the value of the buyout when a partner left the farm
- Ensure the partnership agreement does provide for an exit strategy
- Ensure all parties are aware of the risks that cases like Ham exist
- Take steps to ensure all potential business disagreements are covered by this partnership ‘wonder document’.
Julie Butler FCA, founding partner, Butler & Co,
(Article published by www.accountancylive.com)