Where a farming operation is structured as a partnership, it is important to establish whether the underlying land is partnership property for a number of reasons. These can include: whether the land is potentially subject to a legal rights claim on the death of a partner; ascertaining the sums due to the partners on the dissolution of a partnership; and also for tax reasons, such as whether the land will qualify for 100% Business Property Relief for inheritance tax purposes (if it is partnership property), as opposed to 50% relief, if it is not.
How do you decide whether land is partnership property?
The land may clearly be held in the partnership’s name (or in trust for the partnership). While this is common in practice, in many cases the title is in the name of one or more of the partners, as individuals. If this is the case, for many, the next port of call will be the partnership accounts – if they show the land as a balance sheet item then surely that is conclusive of the position?
Unfortunately in reality, the position is not quite so clear cut. Take for example the recent English case of Ham v Bell [2016] EWHC 1791 – land owned by the partnership had been listed in a partnership’s accounts for five years before it was removed, following a change in accountants. The fact that the land had been noted as a partnership asset was not conclusive evidence that the land was partnership property (and in this case it was found that the land did not belong to the partnership). It was emphasised that there must also be conduct to the effect that the partners intended certain land to be partnership property. The accounts may provide support for this intention, but cannot be the only evidence.
While the case of Ham is important, it should not be assumed that accounting entries are to be ignored as there are cases where the courts have placed significant weight on them. The Scottish case of Jack v Jack [2016] CSIH 75 is an example of where the failure to note the land as a partnership asset was seen as strong evidence that the land was not partnership property.
How important are accounting entries?
Firstly, while accounting entries are not in themselves decisive, they are evidence that the courts can look at when deciding whether land is (or isn’t) partnership property. Accordingly, accounting entries should not be ignored; they should reflect what the partners think the position is. Secondly, where there is doubt (for example where the land is in the name of a single partner) further steps should be taken to clarify the position. This might involve putting in place an appropriate declaration of trust, or including a specific provision (for example in the Partnership Agreement) that the land is, or is not partnership property. Given the value of farmland, taking these simple steps may lead to significant savings in the future.
At Shepherd and Wedderburn, we provide advice on all aspects of rural law relating to farming, partnerships and tax planning. If you have any queries in relation to the above, please contact a member of our Rural Property or Private Client team.