What many do not realise is that unless there is joined up advice, many could be in a position where there is no partnership agreement, or an out-of-date partnership agreement that contradicts with any will that they have had prepared. Not only can this irreconcilably divide a family, but it can also cause the farm to be sold, undoing many generations of hard work.

A partnership is merely a relationship that exists between two or more people carrying on a business with a view to making profit. Thus a partnership may arise purely out of conduct rather than an agreement. Unlike a company, there is no requirement for a written constitution and many consider it unnecessary to have such a formal arrangement in place, particularly when it is regarded as a “family business”.

When there is no formal agreement, the archaic Partnership Act 1890 provides a statutory default position. This may seem fine while everything is running smoothly but unintended consequences can arise when there is death, change of circumstance or disagreement. This can be extremely stressful, timely and expensive to resolve without clear provisions.

Without a written agreement, the Partnership Act states that upon death of a business partner, the partnership is automatically dissolved. Surviving partners must sell the business and its assets before making payment of the deceased’s entitlement to their personal representatives with interest at 5% (if not paying ongoing profit)!

The question then arises as to what the “assets” are - is it the current account? Or interest in the business? Or, is it the land? Or, all of it? This affects how much has to be paid to the deceased’s personal representatives. In addition, Inheritance Tax reliefs maybe fragile which could result in land being sold to pay Inheritance Tax as well as to to pay out to the deceased’s estate.

Without a written agreement, surviving partners or the deceased’s personal representatives can find themselves trawling through old correspondence in an attempt to show contrary intentions to the statutory position such as evidence on what was agreed with the other partners. Often, it comes down to one recollection over another’s. All of this can destroy the viability of a farm.

If the business is to continue, the surviving partners will need to form a new partnership but that new partnership must have the resources to pay out the deceased’s entitlement. Estate administration can take 12 to 18 months during which accounts will be frozen, creditors will be unable to be paid and assets cannot be sold/ charged which can cause insurmountable difficulties.

Furthermore, even if there is a partnership agreement, consideration needs to be given to the wording. It is not uncommon to find partnerships that are 40/50 years old. In the 1960s/70s and before, it was not unusual for agreements reached between the older generation that the farm would pass to the surviving partners. This could be two brothers who perhaps inherited the farm from their parents. This often works well until the next generation arrive.

If the partnership agreement has not been updated and it provides for the deceased’s share to pass to the survivor, it would seem that the farm could pass to the deceased’s brother not his wife or children. With many farms being asset rich and cash poor, this could effectively make insufficient provision for a surviving wife or children and possibly not even give the deceased’s wife security in her own home without a claim being made possibly by the courts.

It is also not unusual to see vague statements in a partnership agreement such as “all assets used for the purposes of the partnership shall be partnership property” which, as said above raises ambiguity and a further potential dispute with co-partners, beneficiaries and HM Revenue and Customs!

Sadly, neither is it unusual to see wills where a partner has attempted to leave “the farm” to one beneficiary when the partnership agreement provides otherwise. Again, what constitutes “the farm”? It only leads to unnecessary complication at an already stressful time.

All these disputes are unnecessary by careful lifetime planning. It is essential, therefore, when drafting a will or partnership agreement, to consider the provisions of both documents to ensure they work together. If there is no written agreement then the provisions of very old legislation will apply. At the very least, this will mean that the partnership will end and payment in some form will need to be paid to the deceased’s personal representatives with interest or continuing profits.

To protect your family, make sure you have an up-to-date will and partnership agreement that do not conflict with one another. If you have both already, do not amend either your will or partnership agreement without considering the terms of both documents together and make sure that any agreement and the farm accounts clearly identify what the partnership assets are and that the income and capital treatment of land owned by each partner is clearly set out. And finally, do so regularly!

This article is from the latest edition of our Agricultural Briefing. To receive future copies of any of our newsletters directly to your inbox, please visit  our preference centre  to register your interest.