It is fair to say that this is not the author’s first article on the need for the robust farming Partnership Agreement. However, there is no apology for re-emphasising the risk of having no Agreement.
100% not 50% BPR – potential hope value
The tax need to secure 100% Business Property Relief (BPR) as opposed to 50% BPR is an obvious key point. The detail of the 50% restriction is as follows:
- Section 105 IHT Act 1984 defines a number of categories of relevant business property
- 105 (1) (a) A business or an interest in business (rate of relief 100%)
- 105 (1) (d) land or buildings, machinery or plant used by a partnership of which the transferor was a member or a company which he controls (rate of relief 50%)
The key for achieving 100% BPR as opposed to 50% BPR is therefore to ensure the property is partnership property but not simply jointly owned with beneficial ownership retained through the agreement.
BPR is so key for potential “hope value”
It is generally considered that most farms have some form of hope value (market value minus agricultural value) in respect of development potential. Such hope could be in the form of barns, buildings, land near the village, and of course land already designated for development. It is essential the client is warned of the tax negatives. It is also important that the land is used in a trade and not just held as an investment to achieve BPR.
The Risk of Farming Dispute
It is worth quoting from the case Davies & Another v Davies  EWCA Civ 568 known in the national press as “Cowshed Cinderella”. This was an appeal in relation to a successful claim that has been made by a daughter (Eirian Davies) against her parents (Tegwyn and Mary Davies) with regard to an interest in their dairy farm which Eirian claimed based on the doctrine of “proprietary estoppel”.
The core issue in the appeal was whether Eirian’s reliance on the assurances made by her parents gave rise to sufficient detriment so as to entitle her to a share in the ownership of the family farm. It is worth quoting point 9 of the judgement of the Davies case:
“Commencing in 1997 discussions took place between Tegwyn, Mary and Eirian with a view to bringing Eirian into their farming partnership. Eirian signed a partnership agreement in March 1998 in the expectation that her parents would promptly sign it as well. Upon signing she believed that she became a partner and that she would have a long term future in the business. In the event Tegwyn and Mary did not sign the agreement, either then or subsequently. At the time, an investigation was being carried out seeking to recover sums of money from farmers, including Tegwyn and Mary, who supplied milk under an agreement with Elm Dairies. Tegwyn and Mary decided not to sign the partnership agreement before the Elm Dairy investigation was concluded. The investigation was not concluded until 2005. She did not find out until 2001 that they had not signed it.”
It can be argued that so much could have been resolved without the need for such hefty court costs and stress if the partnership agreement had been finalised but how many farming clients are in a similar position?
Accounts and Partnership Agreement – hand in hand
It is suggested that at the point annual Accounts are submitted to farming families consider attaching a partnership agreement to them where this differs from the terms of the Partnership Act 1870. All farm Accounts should refer to the partnership agreement and date of signing, and that the agreement becomes an integral part of the Accounts.
Any partnership Accounts that are prepared without sight or knowledge of the partnership agreement should have strong warnings as to the concerns for where no legal written agreement is in existence. In particular, the automatic dissolution of a partnership under the Partnership Act 1870 on the death of a partner.
All clients, particularly farming clients, must be made aware of the principle of “proprietary estoppel” and the risk attached to reliance placed on assurances of this nature. Such statements and assurances could well be made at meetings held to approve Accounts, and this emphasises the need for accurate minutes to be taken of all meetings involving professional advisers. Farm values have increased and development values have returned. However, legal protection does not increase to help provide clarity and security for farming families unless it is sought and often because such clients are reluctant to pay the fees, the protection is achieved.
Reproduced by kind permission of LawSkills Ltd from their website (www.lawskills.co.uk). A site dedicated to helping Private Client Practitioners.