Business Clinic: Can we bring in partners but retain control?
© Jonathan Mills/iStockphoto Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help. Here, Andrew Morris, a partner in Thrings agriculture team, gives advice on how to bring in new young partners with restrictions.
See also: Business Clinic: how do we negotiate partial surrenderof AHA tenancy?
About the author
Andrew Morris, partner in the agriculture team. Andrew, a partner in Thrings’ agriculture team, has advised on farming partnership issues for more than 30 years, also working on substantial property and other business transactions.
Succession, asset protection and diversification all present challenges to achieving efficient business structures.
His expertise on wills and powers of attorney and his experience as an executor and trustee also come into play in advising families.
Q: We want to bring our two adult children into the partnership on our 324ha mixed farm where we have also diversified into holiday accommodation and a livery business.
They are both in their mid-20s, have been to agricultural college and are enthusiastic and hardworking. However, we want to limit their responsibility for financial and other decisions until they have had a few years’ experience and we can be confident in their judgement.
Can we write this into the partnership agreement so that it is clear from the outset how we see things working. If yes, how should we do this and if no, what do you suggest?
A: In a farming business such as yours, having a partnership agreement will deal with your concerns and, if approached correctly, adding your children as partners could provide greater resilience to the business, with stronger prospects and options for succession.
A partnership cannot exist with only one partner and the risk of automatic dissolution on the death of one of the partners here will be avoided through adding to the number of partners by bringing in the next generation.
Adding partners in this way will also provide incentivisation, and the prospect of better income and capital taxes outcomes, making the business more robust.
It is though essential if you are to address your concerns, that this change goes hand-in-hand with a full review of the existing partnership agreement or creating one if none exists.
Asset treatment
The agreement must deal thoroughly with all the assets of the business and land in particular. Having all land and buildings used by the business as assets of the business, will give a much better prospect of getting inheritance tax (IHT) relief.
Business property relief (BPR) might then apply to land and buildings used in the diversifications which are no longer used for agriculture.
Occupation for agriculture is a pre-requisite for agricultural property relief (APR).
As such, if the assets used for holidays and livery are part of the financial structure of the business, and the business viewed in the round remains one that is trading, then all assets should qualify for either APR, by virtue of occupation for agriculture, or BPR, because they belong to a trading business.
This will help mitigate the risk to the business presented by the recent restrictions on IHT relief.
To be trading, more of the income, capital and time must be deployed in the trade rather than the receipt of rent which is viewed for IHT as investment activity.
Transfer of value
The partnership agreement will show clearly how the capital of the business and the value represented by land is held by each partner, so you ensure your children will only share that value if you transfer it to them, thereby safeguarding assets in the business in case the introduction of the new partners doesn’t work out.
A mechanism for controlling capital growth can also be introduced to incentivise their work.
This can operate in several ways but allocating future potential growth in value of the business to them can help manage the value of the interest in the business retained by the parents within the IHT reliefs available.
Control of the business can be retained by the parents by the inclusion of either reserved decisions which must be made only by them, or by listing matters which require consent of all partners.
Weighted voting rights
As a further alternative which might incentivise your children, the partnership agreement can provide for weighted voting on certain specified issues.
Votes on those matters might be allocated to each partner according to the value of their capital in the business, for example. That way your children will accrue votes as the value of their capital grows over time.
Reserved decisions and controlled matters would generally be specified and might include issues like a change in the operating activities of the business, borrowing, leases or disposal of land.
Introducing the next generation will help to safeguard the future of your business, harness their energy and give them incentive to push forward.
Having a sound partnership agreement will support this, ensuring proper allocation of value in the business, and keeping control over important business decisions with you for the time you require.
As long as you take professional advice, yours is a good proposal.
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