The Farming Partnerships
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The Farming Partnerships - 100% BPR As Opposed To 50% BPR
inheritance tax cases such as Balfour
(Earl of) v HMRC  UK UT 300)
and McCall (PN
McCall & BJA
Keenan (PR of Mrs McClean) v HMRC (2009) STC 990) have shown
of Business Property Relief (BPR) and the hunger for HMRC to try and
relief when it appears the correct conditions have not been met.
farming partnership does have the fall back of
Agricultural Property Relief (APR) at agricultural value and also 50%
an asset owned by a partner provided the asset is used in the
showed the importance of BPR where there are rental properties and
is an investment business integrated into the main trading business.
followed on from the finding of Farmer
(Farmer’s Executors) v IRC  STC
(SCD) 321) where BPR was achieved on 22 let
cottages. The value of the rental
property at stake was
high and there was a lot of inheritance tax relief at risk.
showed the importance of BPR for development land as the land involved
case was worth well over £4m whereas agricultural value was only
£165,000. APR was
not enough; BPR was needed to shelter
hope value (the difference between market value and agricultural value).
land prices having increased by approximately 100%
between 2005 and 2010 and development opportunities resulting in values
returning since the apparent crash of 2008, there are large values to
protect. As a tax
planning point every farm should
understand what its current value is in terms of not just agricultural
but full market value.
used by the partnership
a partner owns property personally (i.e. not on the
partnership balance sheet) which is occupied or used by the
partnership, 50% of
the value of the property will be excluded from the calculation of
tax when that partner dies.
are many tax advisers who argue that the simple
inclusion of the assets on the partnership balance sheet is not enough
that they are partnership property and eligible for 100%
relief. When it comes to the
availability of BPR at
the rate of 100% for land in a partnership case, it is assumed that the
question will come down to whether the land is a ‘partnership asset’,
one that appears to be ‘owned’ by just one of the partners.
It is assumed that if the
‘partnership property’, then the value of the land will be included in
value of ‘the business or an interest in the business’, qualifying for
at the rate of 100%. This
is an approach
followed in paragraph IHTM 25104 of the HMRC IHT Manual. If
it is not a partnership
asset, the land
will only qualify for relief at the rate of 50% under section 102(1)(c)
interest v beneficial interest
of the 100% relief can be obtained through
the drafting of the family farming partnership agreement and this
drawn up so that whilst the partnership remains in force, the land
be a partnership asset. This
original owner does not have a “proprietary interest” in the land.
The objective will then be
achieved. If an
asset is to be held as partnership
property but allocated wholly to one partner the draftsman’s approach
to be to ensure that none of the other partners, except the intended
have any “beneficial interest” in the asset.
Clarke  1 A11 ER 779
was a dispute about what was partnership property.
Harman J found that the only term agreed by the
parties was that profits should be shared equally.
He rejected guidance from the accounts
because of errors in the way in which they were drawn up, and laid down
following principle ‘No more agreement
between the parties should be supposed than is absolutely necessary to
business effect to that which has happened’ (see  1 A11
ER at page
782, letter a). Applying
the trading stock was a partnership asset, but the lease of the
in the name of only one partner was not.
land is included on the balance sheet so that the
owner has a beneficial interest but not a proprietary interest, there
is still the
need to prove that the land is a partnership asset. Case
law suggests that there is an evidential
burden to be surmounted, and also that the courts may be reluctant to
to be surmounted with the aid of accountancy evidence.
v Morris  1 A11 ER 1032, a man and woman, who were
unmarried but who
lived together, purchased a farm which they held as joint
tenants. They lived at the property
and carried on a
partnership, without a written partnership agreement.
The woman died in an accident.
The question was whether the farm had become
a partnership property (severing the joint tenancy) or whether the
became solely entitled by survivorship.
The High Court held that even though the farm was shown as
asset in draft accounts, it had not been made partnership
property. This point is reinforced
by an earlier
decision, Miles v Clarke (see
importance of correct drafting of the partnership agreement
number of partnerships operate without a written
Partnership Agreement, which has obvious dangers as it is important to
the terms upon which the partners agree to carry on business together.
This should go beyond such
matters as profit
sharing, for example to specify what should happen in the future if
there is a
dispute or a partner leaves or dies.
importance of the drafting of the partnership agreement is therefore to
down terms specifying what is to happen when the partnership ceases, or
land ceases to be partnership property.
For example, if the land is sold, how will the sale
partner will have been credited with the value of the land, in his
account, which should be adjusted to take account of any profit or loss
realised, by reference to the book valu16
On the partnership ceasing, the agreement may provide for
appropriated to the landowner partner or towards his capital
BPR for land which to a great extent may be
regarded as beneficially owned by just one of the partners will
a carefully drawn partnership agreement.
Not necessarily a deed, as set out by Hoffman LJ in IRC v Gray,
but a detailed written
agreement which defines the
position on partnership assets.
set of accounts signed by the parties may well be
regarded as evidence of agreement between the partners on basic trading
concerns, such as the division of the profits shown in the annual
loss account. However,
unsupported by a detailed written agreement cannot suffice by
provide the evidence of the detailed and intricate agreement as to
ownership and need to ensure that the land is effectively beneficially
just one of the partners.
HMRC of partnership assets and 100% relief
the drafting problems can be overcome, it is
possible to persuade HMRC that an asset, apparently ‘owned’ by just one
partners is partnership property and therefore eligible for 100%
relief. The undisputed facts found
by the FTT in the Balfour case
suggest that in the context
of IHT this can be achieved.
the event of a death, partners often want to make
arrangements which require the surviving partners to buy their share of
can result in a loss
of BPR as there is a binding contract for sale.
is therefore important to ensure that there is no
such purchase obligation in the partnership agreement (or elsewhere).
The better approach is for
each of the
surviving partners to have an option
to buy the deceased partner’s interest in the business.
The funding of the purchase price on exercise
of the option can be funded in advance by means of a life assurance
the life of each partner, held within a trust arrangement.
The trust needs to be
carefully drafted so
that the policy proceeds pass to the correct persons to ensure that
proceeds are free of inheritance tax and other forms of tax.
properly prepared 16
April 2012partnership agreement needs to be
supplemented by an appropriate Will for each partner. In
the first place this is to avoid the
nightmare of intestacy but also so that BPR can be preserved on the
death of a
partner so that there is consistent interpretation between the Will and
above has assumed that the partnership asset on
April 2012hich BPR is sought is farmland and buildings, which is farmed
could apply in the case of, for example, investment property being
to the balance sheet. In
such a case,
there could well be a question of whether there was just a single
as HMRC sought to argue in Balfour,
two separate businesses, one being a ‘trading’ business qualifying for
and the other an ‘investment business’ excluded from relief by section
diversification a large number of the farms include
investments which can be protected by BPR because they are part of the
and always have been part of the business.
In the cases of Balfour
and Farmer all the investment
let property) had evolved from traditional farming assets as part of
business. In Farmer where there had been
buildings for livestock, farm
workers cottages etc, it would be inappropriate to try and introduce
assets and then try and claim 100% BPR thereon.
are a lot of partnerships where land and
property used in the partnership are not included in the
accounts. That might just be an
oversight on behalf of
the accountant who has drafted the balance sheet or it could be a
misunderstanding of the partnership agreement. Regardless,
a complete review does need to be
undertaken of all partnership assets and assets owned personally.
tax planning purposes all the farm assets should
be valued at both agricultural value and market value as previously
should be what is effectively a BPR “audit”
to see if BPR would be achieved, and that is in terms of both the 100%
and 50% relief
the nature of the
transaction and whether it would be included in the business as in Balfour
or qualifying as a business instead of a grazing agreement
as in McCall.
Many have argued that the recent furnished
holiday let case of Pawson (Mrs N V
Pawson’s Personal Representative v
HMRC  UK FTT 51) has “lowered the bar” for BPR with
regard to the
degree of services in order to achieve BPR.
It is understood HMRC have appealed.
Before partnership agreements are updated (or even drafted
for the first
time), it should be fully understood what is required both in terms of
partners want and what is the tax efficient inclusion of assets.
It is important to establish
who owns what
property, what reliefs can be achieved and what protection there could
BPR is needed at the 100% rate.
About the Author
Supplied by Julie
Butler & Co, Bennett House, The Dean, Alresford, Hampshire,
Tel: 01962 735544. Email; firstname.lastname@example.org,
the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine
ISBN: 0406966540, and Stanley: Taxation
of Farmers and Landowners (LexisNexis).
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Article Published/Sorted/Amended on Scopulus 2012-07-19 10:10:09 in Tax Articles