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Partnership Property - In Or Out Of The Balance Sheet


Julie Butler - Expert Author

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17 July 2013

Further to the article in April concerning partnership property and the importance of a partnership agreement, the big question asked is should partnership property be in or out of the balance sheet in order to achieve maximum tax relief?

With more and more rural businesses needing Business Property Relief (BPR) for cottages as was shown by the case of Balfour [2010] UKUT 300 (TCC), by development land as was shown by the case of McCall v HMRC [2009] NICA 12, the need for 100% BPR as opposed to 50% BPR is increasingly important for diversifying farmers and mixed estates with other assets.

Not all diversification projects qualify as Agricultural Property Relief (APR) and then BPR is needed. With increased land values this importance between 100% or 50% BPR is a huge inheritance tax bill. The average owner of the farmland in the UK is well over 60 years of age and a lot of that generation have not passed down their farms to the next generation; they are planning to do that on death and on death they will need 100% BPR ideally.

The big question therefore is should the property be in or out of the partnership accounts? The obvious answer is the partnership property should be in the partnership accounts. Such treatment is proof that it is part of the partnership and that there should be signed accounts showing that this is evidence of the fact that they are partnership property. The problem in the case of Barton v Morris [1985] 1 A11 ER 1032 was that the partnership accounts were not actually signed. It is generally considered that the other side of the entry if the land is included in the balance sheet is debit freehold property, credit land capital account. Ideally that land capital account should be split between farmhouse, cottages and land clearly showing the different amounts of the respective freehold property.

A Separate Trust Deed

The structure that can be adopted is to have a separate trust deed by which land is stated to be held on trust for a partnership and to be held as partnership property. It is not necessarily to have two trustees holding the land, although if there is to be any sale of any part of the land in the future, a second trustee would have to be appointed at that stage to receive the sale proceeds. This is a requirement of section 27 Law of Property Act 1925.

The partners’ interests in the land will be dealt with by the partnership agreement. This would set out the profit sharing ratios for both income and capital. Where the land is held as partnership property, it is often recommended that more than one partner has an interest in the capital in the land. See, for example, the Lady Fox case. If only one partner has all the interest in the land, it is questionable whether the land truly is partnership property. One partner may however have nearly all the interest in the land, say 95%.

An alternative way of setting things up is to have a partnership deed and to incorporate the trust of the land for the partnership within this document. A simple partnership agreement cannot set out a trust of the land as trusts must be set up by deed. If preferred, the partnership agreement will simply state that the partners interests in partnership capital are as set out from time-to-time in the partnership accounts. This however is not all that satisfactory since if one partner does not agree with the accounts in one year it leaves open what the capital interests are for that year.

Practical Problems

One classic problem area can be a sole trader taking on a partner. The sole trader owns all the land and they take on the partner to really help them with the income side of the business, to help increase profitability – in farming this can often be a son or a daughter, and this can instantly strip the BPR eligibility from 100% to 50%.

Another example can be husband and wife where they are the owners of the land but is it held jointly or is it partnership property? Historic old situations should be reviewed. The simple question is that all freehold land and buildings category in the fixed assets of a farm balance sheet should be reviewed. If there has been a change of advisers, historic details are lost and there is a query, for example a change in the partnership or a dispute, assets can be very complicated and they should be sorted out in advance.

The importance of a partnership agreement has already been stressed but the review of the analysis of what is in that freehold property and how it should be shown on the accounts is another big question. In some cases it just simply is not clear and entitlements to property have not been protected. Situations can arise which are not intended to happen, for example on death or retirement the farm property may remain with the continuing partners who may have to pay out the deceased’s or retiree’s share, but the beneficiaries of the estate may not have any rights over the partnership property.

Action Plan

Review all property where a partnership is involved or a partnership is proposed. Check whether the land is in or out of the balance sheet and how that should be shown and look at protecting the property in a way that all the partners understand. The matter must be discussed with partners. The accounts must also have notes to the accounts explaining ownership in an ideal situation.

When matters have gone wrong with regard to the ownership of a property, the question of how the property was funded is looked at. If the property is funded via monies held by the partnership and a loan is on the partnership balance sheet this would point towards a partnership asset. It is therefore important to review all loans. With the Finance Act 2013 adding an additional complexity to property and loans and how loans are secured, this is a very important time to review partnership property in the accounts, partnership property not in the accounts, how it is disclosed and also looking at the loans relating to how the land was funded.

Practical Planning – review all existing loans

Much IHT planning will have to be revisited but, as has been set out, a lot of the security for the farms arose through simple practical commercial drivers but nevertheless all business loans should be reviewed.

All business loans and the Accounts in which they are reflected must be reviewed as soon as possible. Permanent files should be scrutinised for the original loan documentation and working papers must be followed to check what assets the loan was used to purchase. In future the trail for all loans, eg conveyancing documents etc and the Loan Agreement will need to be readily available.

Practical Action Points

  • Review all partnership property and property used in a partnership.
  • Review all old loan agreements and ensure the documentation is held on file to be able to prove the loan was in existence before 5 April 2013 and what exactly the purpose of the loan was.
  •  Be very careful about taking out new business loans and consider the IHT implications post 5 April 2013.
  • Change approach to IHT planning and loans. Consider selling non-business assets to fund capital needs.

About the Author

Supplied by Julie Butler F.C.A. Butler & Co, Bennett House, The Dean, Alresford, Hampshire, SO24 9BH.  Tel: 01962 735544.  Email;, Website;

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).

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Article Published/Sorted/Amended on Scopulus 2013-12-02 09:10:24 in Tax Articles

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