Font Size

The Case Of Ham - Tax Importance of the Partnership Agreement

 By

Julie Butler - Expert Author

Tax Articles
Submit Articles   Back to Articles

9 December 2013

Protecting of the Ham (bringing home the bacon)

With farmland prices having “rocketed” upwards in value in the last decade and development potential returning through changes to planning regulations in the summer of 2013, there is greater need to protect the land values. It is understood that despite this big worry very few farming partnerships have undertaken the work and expense of an up-to-date, well thought through Partnership Agreement.

Facts of the Ham case

Mr Ron and Mrs Jean Ham, husband and wife, started their farming business in 1966 with a modest 5 hectare plot, and continued growing the business from this time onwards. Lower West Barn Farm, Frome (95 hectares) was purchased in 1986.

John Ham (son) joined the farming partnership on 1 October 1997, when the family farm in Frome covered 178 hectares.

Ham Senior described the farm as his ‘only source of income’ and his ‘legacy to the children’. He hoped that one day John would take over the running of the farm. John Ham joined the farm aged 19, and worked with ‘youth and vigour’ for the next 11 years to 2009. In 2009, the three way partnership began to unravel. John wanted to drive the farm in one direction, and his parents (aged at this stage in their early 70s) disagreed and refused to relinquish control.  John then ‘retired’ from the partnership on 27 February 2009, citing irreconcilable differences with his parents.

Irreconcilable Differences

How many farming partnerships are there across the UK where there are differences that cannot be resolved? Likewise how often is there a Partnership Agreement that does not provide help, or indeed no Partnership Agreement?

The Inadequate Partnership Agreement

Per the terms of the Partnership Agreement, the other partners would buyout the leaving partner after 3 months notice of the intention to quit. It is here that there was the key dispute over the value of the buyout:

a)      John felt he was entitled to a share of a full market value of the farm, whereas

b)      Mr and Mrs Ham argued that their son’s share should be assessed on the book value of the assets – a far more meagre payout as it ignores the soaring land values.

The dispute occurred because of the poorly worded Partnership Agreement – what value John was entitled to was a matter of interpretation, rather than a clear defined value or basis of calculation specified in the original 1997 Partnership Agreement. One of the Appeal Court Judges expressed sadness that a lack of clarity in the Agreement’s drafting had caused so much ‘anxiety and expense’ to the family.

Sadness at the ‘anxiety and expense’ to the family

With so much at stake why are quality Partnership Agreements avoided? The cost? The problems of facing very difficult decisions? The parents will only be able to afford the payout by selling thus breaking up the farm.

The Initial Hearing

The initial Court hearing was at Bristol County Court in March 2013. HHJ McCahill QC, presiding, decided that, as a matter of interpretation of the partnership deed, John’s share was to be determined on the same basis as annual accounts were drawn during the continuation of the partnership, rather than on the basis of an up-to-date market valuation of the partnership assets.

Historic Cost or Market Value?

What is the basis under which partners should be paid out – historic or market value? John appealed this decision and the case went before the Appeals Court in London in October 2013. On Wednesday 30 October 2013, the three judges ruled that “John was legally in the right and that his parents must be held to the bargain they struck with him 15 years ago”. Lord Justice Lewison said “I reach this conclusion with some reluctance because, on the particular facts, it may be thought that John will receive a substantial windfall”. The other two judges also expressed sympathy to Mr and Mrs Ham Senior, but concluded that John was entitled to make a market value claim.

What difference in farm values between say 1986 and 2013 or indeed 1966 and 2013.

Substantial Windfall

Could it be that a badly drafted Agreement will result in such a windfall?

The Tax Importance of the Partnership Agreement

The potential for dispute is not the only reason for a well drafted Agreement. There is also the need to identify what is ‘personal’ property and what is ‘partnership’ property for the availability of 100% as opposed to 50% BPR. The tax facts are straightforward – farmland made available to a partnership only achieves 50% Business Property Relief (BPR) whereas ‘partnership’ property achieves 100% BPR.

Farms need BPR to protect so much of the farm. Examples are development and amenity value, non-agricultural activities, cottages etc.

Action Plan for Advisers

  • Ensure there is a robust updated Partnership Agreement in place from the commencement of every farming partnership
     
  • Review all Partnership Agreements, and ensure clarity has been achieved – the whole Ham case was triggered because the deed of partnership was not clear on the value of the buyout when a partner left the farm
     
  • Some Partnership Agreements do not even provide for an exit strategy
     
  • Ensure all parties are aware of the risks that cases like this exist
     
  • Take steps to ensure all potential business disagreements are covered by this partnership “wonder document”.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email: j.butler@butler-co.co.uk.  Website: www.butler-co.co.uk

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis).



Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2014-05-23 09:41:03 in Tax Articles

All Articles

Copyright © 2004-2019 Scopulus Limited. All rights reserved.