Industry Eye: Partnerships need to be clear over obtaining correct property relief

The findings of the tribunal were that the structure and management of the estate were such that its activities were not wholly or mainly the making or holding of investments and that Business Property Relief would be available.

The issues examined in Brander can apply to all farming businesses, in that, if your assets are held and managed in the most appropriate structure, you can maximise the opportunity to attract Agricultural Property Relief and Business Property Relief.

For sole traders the issues are simplified in that, if an asset is used within the business for agricultural purposes it should receive Agricultural Property Relief (APR), at 100 per cent of the agricultural value of the asset, and Business Property Re-lief (BPR) at 100 per cent on the difference between open market value and agricultural value.

The position becomes less straightforward for partnerships. If all the assets are owned by the partners and are on the partnership balance sheet, both reliefs should be available at 100 per cent. However let's compare this with a family partnership where the land and buildings are owned by the parents who are in partnership with their children. The latter have no interest in the land and buildings which are held off balance sheet.

We will assume that the farmhouse meets the tests and will qualify for agricultural property relief. When the children were introduced into the partnership it was felt that a partnership agreement was not necessary, so the partnership is a "partnership at will" governed by the provisions of the Partnership Act 1890.

The partnership has occupied the farm without a formal agreement to occupy from the parents for more than seven years and the whole of the farm is in agricultural use. On the face of it, the assets should receive 100 per cent APR.

To qualify for APR, where land is let under licence, the owners must be able to regain vacant possession within twelve months. This period has been extended by extra statutory concession in other circumstances. Where there is only informal occupation the Revenue contends that in the absence of a formal agreement, the right to regain possession only occurs when the partnership is determined and therefore a claim for APR can be denied.

Where the land and buildings have potential development value the excess over agricultural value may attract BPR if the assets are used within the partnership business. Assets held by the partnership on the partnership balance sheet will attract relief at a rate of 100 per cent. Those owned by the individual partners but used within the partnership and held off balance sheet will get relief at the lower rate of 50 per cent.

In our example, the partners believed that they had no exposure to Inheritance Tax because they were farmers and all the assets were in agricultural use, but their partnership structure would not support their claim with the potential for full relief to be denied. A simple remedy of a formal partnership agreement and restructure of the assets, would enable them to strengthen their claim for relief at 100 per cent.

CW 30/10/10