Business Clinic: Is farm a partnership asset or personal asset?

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.

Here, Neil Berry, tax partner at accountant MHA, advises on the importance of establishing the correct ownership of farming assets for tax planning and succession purposes.

See also: Business Clinic: succession decisions raise family concerns

Q. When my father died in 1984, he left my brother and I a small farmhouse each, and the rest of the farm (about 400 acres, some with possible development value) to us as joint tenants.

Since then, we have added 50 acres, converted some of the buildings into industrial units (which now provide about one-third of our income) and brought our wives into partnership.

My brother runs the livestock side from his house and everything else is run from mine. All the partners are in their mid-60s.

Our daughter and one of her cousins work in the business and ultimately would like to take it on, so, mindful of the forthcoming tax changes, we would like to put a succession plan into place.

We are concerned that the land is in the names of me and my brother only.

I have checked back in the old accounts, and it appears to be on the balance sheet at the price Dad paid for it in 1968 although the land we bought subsequently is shown at cost, paid for by the partnership.

Is the farm owned by us or by the partnership, and does it matter?

A. There are a lot of issues here –succession is probably relatively straightforward. Given the size of the farm, the ages of the partners and the clear lines of succession, you should be able to avoid the tax pitfalls, but as the first step in that process you will definitely need to consult a solicitor to straighten out the existing land ownership. You will also need to consider the following:

1.  Switch tenancy

Holding the land as joint tenants is not helpful – on the first death, the land will pass to the survivor automatically.

You almost certainly need to switch it to “tenants in common” so you can leave it under your wills.

2. Evidence of partnership

The issue of whether the land is a partnership asset needs to be determined. Ideally it will be covered in the partnership agreement, but if not we need to look at the other evidence.

Here, the fact that it is on the balance sheet (even at historic cost) suggests it is a partnership asset, as does the treatment of the subsequent additions and the fact that they were made from partnership funds.

Arguably, you are holding the land as trustees on behalf of the partnership (in which case you should have registered it with the Trust Registration Service).

The wording of your father’s will may also give guidance. If it says, “I give the farmland and assets to my sons to farm in partnership” it should be conclusive.

3. Tax

The ownership of the land is important for inheritance tax purposes.

Agricultural property relief (APR) is given on the agricultural value of land and buildings, but any development value or the value of non-agricultural assets will only get business property relief (BPR) if it is used in your business.

A useful tax case, Farmer v IRC in 1999, confirmed that BPR can be claimed where a letting business is carried on within a farming trade but does not “predominate”.

While APR is given at 100% on all qualifying land, BPR will only be given at that rate for assets that are “part of a business”, so land owned by the partnership should be fully relieved but land owned by a partner and used in the partnership business will be relieved at half that rate.

4. Two farmhouses

The fact that there are two farmhouses on the land may also be problematic, although in your case the modest size, historic links and the fact that different aspects of the business are run from each house could be helpful.

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