The partnership perils of right-to-buy clauses

OLD PARTNERSHIP agreements can contain terms which render your assets ineligible for inheritance tax relief.

Right-to-buy clauses are fairly common in agreements which have not been reviewed for many years, and can result in a substantial IHT liability, warns Sean McCann, personal finance specialist with NFU Mutual.

“We recently had a meeting with two farming brothers whose agreement was drawn up in 1968 and really hadn”t been looked at since then.

“Their agreement contained a right-to-buy clause which stated that if one partner had died the other would be forced to buy the share from the deceased partner”s family and the other side would be forced to sell.”

Such an agreement can be considered to be a binding contract for sale for inheritance tax purposes, which means both agricultural and business property tax relief may be lost, says Mr McCann. “It is simply treated as if it were a sale agreement concluded while the person is still living and so the assets in question are ineligible for relief.”

The answer is to review partnership agreements with IHT in mind. There are usually several ways to achieve what the family wants, and many ways to protect either the farm or the interests of individual family members, he says.

“A contract with the option to buy could replace the right to buy, and if both parties decide not to exercise that option, then the sale does not have to take place. However, if one partner decides to exercise the option the other must agree.”


Where the funds have to be found to buy a deceased partner”s share to keep the business intact, there is the danger that this could in itself jeopardise the future of the farm, warns Mr McCann. This can be protected by arranging life cover on the partner(s) in question, which can be put into trust to ensure that it is paid out to the parties who would be expected to have to find the cash to buy a share.

Each family will want to arrange things in its own way; the important thing is to realise how valuable these reliefs are and to check that the existing agreements and arrangements will produce what you want and expect them to, says Mr McCann.

For many farming couples, ensuring that both make use of the 263,000 individual nil rate band will be important. Often, a couple will make mirror wills leaving each other everything and this can mean the loss of all of one nil rate band, as transfers of assets between husband and wife are normally free of IHT.

Someone who wants to maximise use of the nil rate band without giving assets to children who they fear may be financially immature, or about whose marital security they are uncertain, could use a discretionary trust. Trustees would be able to give or loan the surviving spouse cash during that person”s lifetime, suggests Mr McCann.

“In the event that any loan is not repaid, it would simply become a debt against their estate.”


Business ventures outside farming are common reasons for the loss of agricultural property relief. Typical ones include the conversion of farm buildings for letting to third parties for non-agricultural use, and letting of land for non-agricultural purposes like off-road sports. The danger is that the larger the proportion of land used for non-farming activities, the greater the risk that APR is lost on the house, too. The rising property prices of recent years make the stakes much higher in this respect, says Mr McCann. “Everyone with assets worth more than 263,000 should check out the impact of IHT on the value of their estate.”

See more