Shropshire Farming Talk: Now is the time to formalise business partnerships

However, tax should not be the sole driver of business decisions – how a business trades and whether a written partnership agreement is in place are equally important.

Until recently, it was normal for farming partnerships not to include any written agreement. 

In fact, this was often encouraged by advisers because it allowed more flexibility in terms of the division of profits to reduce income tax. 

Now, however, the importance of written partnerships is clearer than ever. 

Without a written agreement, the death or departure of a partner results in dissolution, creating significant challenges. 

Banks typically freeze partnership accounts, and without an agreement, this means freezing the business account, disrupting operations and causing unnecessary stress.

A partnership agreement also clarifies ownership of property intended as an asset, defining how it is held and allocating benefit interests among partners – critical elements of a robust agreement.

The challenge of making sufficient income from the farm is getting ever harder, and new tax changes add another layer of complexity.

While incomes are under pressure, farms often hold high asset values, which can lead to disputes over the business and its assets.

One common cause of conflict is whether farmland is considered a partnership asset.

Often included on the balance sheet due to its significant value, it can become a source of contention among partners or in divorce proceedings.

Rising business pressures are also likely to trigger more claims based on estoppel.

While promises are generally unenforceable, courts can uphold them in certain circumstances, particularly within farming families lacking a clear succession plan.

If a promise has been made, either explicitly or through conduct, and someone has relied on it to their detriment, it may be enforceable. These cases are complex and frequently litigated.

Wherever possible, disputes should be avoided and that can be achieved by good communication between partners in a farming business along with a robust set of documents to regulate that relationship.

Once relationships break down, it’s too late to put safeguards in place, so don’t wait until it’s a problem.

by Rory Hutchings, Partner, HCR Law