Limited partnerships can help to smooth the succession path
© Alamy Stock Photo Land and asset values, Basic Payment Scheme cuts, inheritance and capital gains taxes, management responsibility and business risks are all important elements in succession considerations – and in whether a younger individual wants to take a full part in a farming business.
Professionals advising farmers have seen a big increase in the degree of restructuring and succession planning taking place in the past year.
Bringing the next generation into the business as a partner is sometimes an obvious move and one that can be easily made.
However, whether an individual wants to join a traditional farming partnership – also known in legal terms as a general partnership – and take on the unlimited personal liability that this brings is another matter.
See also: Farm partnerships – why a written agreement is essential
In some cases, a limited partnership may be the answer, says Jeanette Dennis, head of the agriculture and estates team at Ashtons Legal.
This structure offers the benefit of an individual being in the business and potentially sharing in profits but without taking an active role – and with the protection of personal liability being limited to the amount of capital a person contributes, the amount they build up, or an amount specified in the partnership agreement.
“Most farmers have maybe two or three children. Take the increasingly common example of a child who has developed a career and thus private and business wealth outside of the farm, has a partner and/or spouse and maybe children of their own,” Jeanette says.
“They may want to come into the business but they don’t want to risk losing their shirt.
“We are finding increasingly that a limited partnership can fit the family and the business. It’s a flexible approach.”
The key is to define at the start how the limit works, Jeanette says.
“There is no blueprint. It is flexible, depending on the individual, the family and the business, but the basis must be clearly stated.
“The written partnership agreement should set out how the limit works – for example, whether it is a strict limit of a certain sum or will be built up (and how that can be achieved), or whether it is a sum introduced by the limited partner. It cannot be zero as there must be some true trading risk.”
The agreement should also clearly state that the limited partner(s) cannot be involved in management decisions and that they do not have a vote on such matters.
This restriction is important, as a breach will mean that the limited partner loses their limited liability.
This said, limited partners can be party to management information, be involved in business discussions and may advise with the other partners on these matters.
It is also common for limited partnership agreements to provide that limited partners need to consent to new partners coming in to the business.
Each family and business is different, says Jeanette, and agreements need to be tailored to their circumstances.
© Istockphoto
A partner in a limited partnership cannot also be an employee of that partnership.
This is a factor to bear in mind when bringing in the next generation as limited partners, reflecting the intended status of limited partners not taking an active role in the business.
Limited partnership agreements should also set out a clear process by which limited partners can be appointed as general partners, so that where the level of involvement of a particular partner changes over time, there is a straightforward pathway facilitating the change in role.
Limited partnerships – how they work and what they must comply with
- They can provide personal financial and legal protection not offered by a traditional general partnership
- They will have two categories of partner – general partners and limited partners. A company or a set of trustees can also be a partner in a limited partnership
- They must include at least one general partner, with responsibility for managing the business of the limited partnership. General partners retain joint and several unlimited liability for the debts of the business and any claims against it
- Limited partners can invest capital in the limited partnership but do not take an active role in management decisions of the business
- Limited partners’ liability is limited to the amount of capital they have contributed, or built up through undrawn drawings, or to an amount specified in the partnership agreement
- Unlike a general partnership, a limited partnership must be registered at Companies House, which removes an element of privacy. However, the limited partnership agreement and annual accounts are confidential and neither these nor any other returns have to be filed
- A limited partnership is not a separate legal entity in the way that a company is. Its trading and capital profits or losses are taxed through each of the partners
- A limited partnership must use the letters ‘LP’ following its business name
- All partners’ names and the business name must be included on official paperwork such as invoices and letters
Tax tips on limited liability partnerships
When it comes to the tax treatment of a limited partner, there are a few considerations, says Steven Rudd, a partner and head of farms and rural business at accountancy firm Larking Gowen.
1) Generally, the limited partner is taxed in the same way as partners in a general partnership on their profits from a trade or profession carried on by the partnership – just as if those profits were derived from a “notional” trade or profession that they carry on alone.
So, they should be taxed at their marginal rates of income tax and be subject to class 2 and class 4 national insurance (NI). The limited partnership still has an obligation to file a self-assessment partnership tax return.
2) Loss relief is different for a limited partner in that the legislation restricts relief against income from other sources (income not from the partnership). It does not restrict relief against income derived from the same trade, whether from earlier or later years.
In every tax year, the limited partner is restricted to the lower of £25,000 or the previously unrelieved balance on their capital and current accounts.
3) Tax relief for interest on a loan taken out by an individual limited partner to provide partnership capital is not allowable.
This is in contrast to a general partner, who can get tax relief on the interest paid on a loan taken out for this purpose.
Registration requirements – limited partnerships
A limited partnership must be registered at Companies House under the Limited Partnerships Act 1907. Until the partnership is registered, all partners will be equally responsible for any debts and obligations incurred.
All partners must sign the registration form. Companies House will usually register a limited partnership within five days of receiving an application.
The registration process requires:
- The name and place of business of the partnership
- Details of the nature of the business
- The full name of each partner, with general and limited partners listed separately
- The amount of capital contributed by each partner
- How the capital contribution was paid – cash or another form (for example, property) which must be specified
- The term (if any) for which the partnership is entered into, beginning with the date of registration
Find more information on requirements.