Easing the path for next farming generation
Introducing the next generation into the family farming partnership can be a difficult concept for farming families.
Some may want to bring in the youngsters but cannot afford for them to take a full equal share from the business. Quite often parents do not want youngsters to have a share of the land and capital as they may have concerns about issues such as divorce, illness or death.
However there are well established ways to find a solution for the next generation. Technically a partnership agreement does not have to be written and if not it will be governed by the provisions of the Partnership Act 1890. However in seeking to deal with bringing in the next generation it is almost imperative for a written partnership agreement to provide the assurance needed by parents and existing partners.
A short summary of the some of the principal ways to deal with this include the following:
• Fixed salary partners. Youngsters can be brought in on a fixed salary together with the usual type of ancillary partnership benefits available to farmers. Once the salary has been paid the profits are then available to distribute between the equity partners.
• It is often the case that the land and property forms part of the partnership capital accounts. If this is the case then the capital accounts can provide that the land and property remains in the name of the existing partners or parents alone.
• A written agreement will almost certainly include clauses dealing with retirement and expulsion. Not that the expulsion clause is often used, but there is the ability for an outgoing partner to receive their capital back but spread over a number of years so the remaining partners can keep the business going from a cash flow point of view.
• Voting rights can be tied to the capital shares so those partners who have the greater share of the capital will be able to control the voting.
• Retirement and expulsion clauses referred to above are very valuable. Otherwise, if a partner needs to leave, the partnership might well have to be dissolved under the 1890 Act leading to unnecessary sales and tax payments.
In short, there are many ways to encourage next generation into the business. These mechanisms can also work the other way around when the parents want to take a back seat and shares can be transferred.
In the case of limited companies there are mechanisms where a shareholders’ agreement can achieve similar results.
With every arrangement the taxation needs to be carefully considered but more often than not this can be dealt with in advantageous ways. Key to all of this is getting a well drawn Partnership Agreement.
Steven Corfield is a partner and agricultural specialist at Shropshire law firm, FBC Manby Bowdler LLP.
