The Need For Partnership Agreement And Shareholders Agreements - Links To The Will
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13 February 2014
regarding the fashionable “mixed member partnerships” being published
December 2013 there is much focus on ensuring that the correct legal
documentation is in place. There
also been some well publicised cases of disputes where Partnership
were not put in place, eg Ham v Ham.
The dispute over
John Ham was entitled to when leaving the partnership occurred because
poorly worded Partnership Agreement – the value being set was thus a
interpretation, rather than a clear defined number or basis of
specified in the original documentation. One of the Appeal Court Judges
expressed sadness that a lack of clarity in the Agreement’s drafting
so much ‘anxiety and expense’ to the family.
Importance of the Partnership Agreement
The potential for
dispute is not the only reason for a well drafted Agreement. There is
need to identify what is ‘personal’ property and what is ‘partnership’
for the availability of 100% as opposed to 50% Business Property Relief
The tax facts are straightforward – farmland made available to a
only achieves 50% BPR whereas ‘partnership’ property achieves 100% BPR.
same applies on property made available to a company, only 50% BPR is
The need for the
correct drafting of the Partnership and
A number of
and companies operate without a written Partnership Agreement, which
obvious dangers as it is important to set out the terms upon which the
and shareholders agree to carry on business together. This should go
such matters as profit sharing, for example to specify what should
the future if there is a dispute or a partner or shareholder leaves or
The importance of the drafting of the Partnership Agreement is
therefore to lay
down terms specifying what is to happen when the partnership ceases, or
property ceases to be partnership property. For example, if the
sold, how will the sale proceeds be treated? Presumably the ‘property
partner will have been credited with the value of the property, in his
account, which should be adjusted to take account of any profit or loss
realised, by reference to the book value. On the partnership ceasing,
Agreement may provide for the property appropriated to the property
partner or towards his capital entitlement.
A set of
company accounts signed by the parties may well be regarded as evidence
between the partners on basic trading concerns, such as the division of
profits/pidends voted as shown in the annual profit and loss account.
However, partnership accounts unsupported by a detailed written
cannot suffice by themselves, to provide the evidence of the detailed
intricate Partnership Agreement as to property ownership and need to
that the property is effectively beneficially owned by just one of the
partners. Likewise, companies need strong guidance through a
Links to Wills
Shareholders Agreement should make it very clear what happens on death
serious illness. Does the person who inherits the share in the business
a partner or director? How is the share in the business valued to
parties? It is also important to see who inherits business interests.
All Wills should
reviewed. Perhaps that will uncover a potential intestacy where there
Will. The consideration to pass business assets to the next generation
BPR or APR on the first death should be given key consideration.
be sought through the Deed of Variation so that assets that do achieve
BPR can be passed down and those assets that do not can be passed to
spouse to take advantage of all the reliefs.
The Deed of
the document where the beneficiaries can vary or alter the Will within
years of death. This can be a very useful planning tool but can be made
meaningless or less effective if there is no Partnership or
Agreement protecting the value of the business owned.
have “blurred” structures as many members of the family help and “lend
with the tasks needed.
The question of
an operation was a sole trade or a partnership was looked at in the
case of G Christodoulou (TCF2819).
This can be
important for all types of tax reliefs – from VAT status for the
artificial separation, or inheritance, to see who was involved.
evidence of this case the tribunal concluded that, on balance, the
was run as a partnership. Many would consider that the taxpayer did
convince the tribunal that there was a separate legal entity for the
restaurant. There was evidence pointing both ways so the conclusion had
reached based on the balance of probabilities. Have all such blurred
been reviewed recently?
case was primarily a VAT investigation, it highlights the need for
definition and documents. How often do stories of businesses or
being stolen come to light– why not employ a legal Agreement to prevent
Action Plan for
there is a robust updated legal Agreement in place from the
that this is regularly reviewed
all 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
farm – the same applies on share buyout
Agreements do not provide for an exit strategy – this needs to be
all parties are aware of the quantum of the risks of not sorting out
Agreement for disputes and tax reliefs
steps to ensure all potential business disagreements are covered by the
document” of a Partnership or Shareholders Agreement
all business property and property used in a business to ensure maximum
relief is achieved.
About the Author
Supplied by Julie Butler F.C.A.
Butler & Co, Bennett House, The
Dean, Alresford, Hampshire, SO24 9BH.
Tel: 01962 735544. Email;
email@example.com, Website; www.butler-co.co.uk
F.C.A. is the author of Tax Planning for Farm and Land
Professional), Equine Tax Planning
ISBN: 0406966540, and Stanley: Taxation
of Farmers and Landowners (LexisNexis).
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Article Published/Sorted/Amended on Scopulus 2014-06-13 09:15:37 in Tax Articles