A partnership may have been the most suitable basis for the farm business when it was formed, but it may not be an appropriate basis in today’s, very different business environment, according to Adam Bradley, solicitor at Taylor Vinter.
“The 1890 Act that has formed the basis of partnerships ever since did not even require a written agreement, but, if it’s the very least you do, it is highly advisable to take the time to draw up a written agreement as soon as possible. It doesn’t even take much effort,” he told a regional CLA conference last week.
More fundamentally, many businesses have drifted on through the years as a partnership, without really considering if this is the best option, he added. He highlighted the high degree of risk to which a partner is exposed should a farm enterprise fail.
This may be particularly pertinent if there are junior family members starting their own enterprises, he pointed out.
He suggested that a Limited Liability Partnership could be a good alternative. Introduced as a new basis for businesses in 2000, an LLP, as a body corporate, limits personal liability, unlike a partnership.
Since the McKenna ruling, care should be taken that the farmhouse does not fall foul of the Inland Revenue, warned Jeanette Hume, director of business tax at accountants Peters Elmworthy and Moore (PEM).
Make absolutely sure that the farm business is being run from the farmhouse. Otherwise, you run the risk of losing Inheritance Tax relief, she said.
She pointed, in particular, to the structuring of farm contractor agreements. “Keep file notes of meetings so you can prove that you are still farming and have ultimate responsibility,” she advised.
Hume also flagged up that the farmhouse can come into question where the farm is structured as a limited company. “It could be viewed that the farmhouse is not needed. To overcome this, the farmhouse should be separated off and could be leased back into the company.”
Hume highlighted a Capital Gains Tax trap that diversified businesses can fall into: “If a high proportion of your income comes from diversification - say letting converted buildings as offices - then your main activity is not farming and may not be treated as a trading business,” she warned.
She said that planning ahead can help overcome this. “Consider passing buildings on to the next generation before they are converted, and then become valuable,” she suggested.
She also gave delegates the idea of raising their trading income by taking on the running of converted farm offices. “By putting in a receptionist, the buildings then become managed offices and thus part of your trading,” she said.
The rise in asset values, particularly land, and commodity prices has brought back a mood of optimism in farming, commented chairman John Kerr, regional chairman for seminar co-sponsor Clydesdale Bank, in his summing up. “This provides greater security value to release capital for expansion,” he said.