New Year resolutions for partnerships
With New Year looming, many will be thinking about resolutions for 2020 and in turn if any changes will be forthcoming about who will be running the business for them in the future. These thoughts will apply whatever political party are in power, or our future position in Europe.
Ashtons Legal act for many farming and non farming family partnerships. On the farming side, the land is often owned by perhaps the older generation with the younger family members being in partnership with them along with some other farming and non farming family members.
Here I write with ideas for ensuring the smooth running of all partnerships, not just farming ones. The key priority is to check and act now to avoid future problems, as part of the risk management of the business.
First and foremost, make sure you have a written partnership agreement. If a partner dies and there is no written agreement under the Partnership Act 1890 the partnership automatically dissolves on that person’s death. This normally comes as an unwelcome surprise at a time when the remaining partners are distressed by the passing of that person. The fact that they do not have an automatic right to buy the deceased partner’s share is often unacceptable, but that is the effect of the law where there is no written agreement. This was confirmed earlier this year in the case of Kingsley V Kingsley where an unwritten partnership case was heard in the High Court. The Court emphasised that this case and the thousands of pounds in professional fees could have been avoided had there been a written agreement.
It is often the case that a partnership covering land owned by the partners can be tax efficient both for inheritance tax and capital gains tax, but there needs to be clear evidence of what land is in the business, who owns it, and what can be done with the land in the partnership by the landowner. To put land in to a partnership you need a written deed and to tie it in with the appropriate partner’s property account as well as with the partnership agreement. At present there are favourable tax implications if you can comply with these three points. To do this, you will need a solicitor and accountant’s input.
If a partnership is unwritten, on the death or departure of a partner there will be an automatic right of sale of the partnership assets at market value. A written partnership can stipulate that the business continues despite a death, plus it can cover the type of valuation on death or departure. It can also set out the mechanism by which the partners can acquire the deceased‘s share, to preserve the assets of the partnership for the remaining partners. In the Kingsley case, the executors applied for market value sale on the death of the brother, Roger. Some thought had been given to a written partnership, but unfortunately Roger and his sister Sally had not actually signed the agreement, which is quite common in practice. If there is no written agreement it remains open to argument.
It is important to check that partnership documentation is up to date, legally compliant and with clear dispute resolution clauses. Plus that it ties in with the individual partners’ Wills.
However, a little known fact is that a partnership agreement overrides a Will. Land in a partnership cannot automatically be left in a Will to a non partner, so make sure that your Will reflects that position.
You can also think about bringing in the next generation to the business: it is now possible to gift part of a partnership to a partner without also gifting them land or property.
Finally, think about how someone can run your business if you are incapacitated. The best solution is by having a Lasting Power of Attorney.
So, for your New Year’s resolution list, I suggest the following:
- Review your partnership agreement
- Check your Will
- Have a Power of Attorney
- Get your partnership accounts to cover all the land and property.
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