Farming Partnership

[flyer61]

Presently I am acting as an executor for the estate of a family member which includes a Farming Partnership (no land). The recently deceased had little income but some assets. The tax return for 2019/20 has been prepared and in it is a substantial amount of income from the Partnership for 30 March 2019 (about £33K). She has drawn £400 per month for some years from it. This has bizarrely made her a higher rate tax payer by a few thousand pounds. Assets were sold in that tax year to meet substantial care home costs. This has crystallised a significant CGT bill.

This 'income' certainly does not appear as cash in her personal account anywhere. Why would the other person (her son also an executor) do this?

Would it be considered in his mothers best interest?

Any guidance from fellow fools gratefully received.

[doug2500]

I can't help much but it wouldn't be unusual in farming businesses to not take payments due out of the business but leave it within the business unless needed. Profits can be volatile so this smooths the cash leaving the business.

[doug2500]

Thinking some more, if the question is: why did the son, needing cash, sell some assets rather than take cash held in the business?

The answers may be:
Business is short of cash due to investment in new shed, tractor etc.
The deceased may have owed money to the business so profits went against that.
IHT reliefs are complicated but it's possibly due to that.

[Dod101]

Are you not able to ask the son? I assume that there is more to your question than meets the eye.

Dod

[G37y]

Hi flyer61
being an executor can be a thankless task and it looks like you arn't to happy with the information you are being given but without more detail (which I can understand you are reluctant to divulge on a public bullitin board) I cannot see how anyone can answer your questions. If it was an accountant who drew up the farm accounts and prepared the tax return speaking to them would be the way to go.
As you have stated the partnership doen't own any land, I cannot see where the capital gain has come from, that would be the first question. Is there a partnership agreement? What ratio are profits devided?

[flyer61]

Thanks for the replies.

The situation is difficult and there is as you have guessed a 'history' around this partnership. The CGT has come about because of selling a single Companies shares (which was the principal asset of the deceased). They had to be sold as there was little income for care home fees (the son had ruled out the letting or selling of the house) and no one could predict how long the deceased might live. Obviously having a very large portion of your wealth in a single FTSE250 share is very risky no matter how well the Company has done in the past. It is a blessed relief that they have passed given life was crap for them.

There is a solicitor involved and I have asked the questions however I cannot help feeling I am doing all the work whilst the goose is being plucked.

I am guessing at two things.

1. Load income against his mother from the partnership (she doesn't receive it) but pays the tax on it. I need to understand 'partnerships' and how they work.
2. Given two people are going to inherit their mothers share it is a clear message that I can bugger your personal tax situation about and there is not much you can do about it whilst you are in this partnership.

Seasons greetings to all.

[G37y]

Hi flyer61
I am not an accountant but have been involved in a farming partnership in the past. To farmers the farming business can be more important than life itself, so I expect there is alot of emotion in all this. You didn't state if you were a beneficiary to the estate or not I think that will make a difference to how the other executor views you, maybe years of hard work building up the business gives rise to a moral sense of entitlement beyond what is actually legal. Also be aware as executor you have a legal obligation to distribute any assets fairly and could be held financially responsible for that. I think you are confusing personal drawings from the partnership with profits from the partnership, yes tax will be paid on the profits regardless of if the money is drawn from the partnership or left within the partnership. Just because the partnership is profitable does not mean it generates much or even any cash, the profits may be just spent on expanding the business or simply just keeping it afloat. If one partner is drawing more than the others in the business the capital share he or she has within the partnership will obviously be reduced. The “book” value of assets within the partnership may not accurately reflect the true value of the assets especially in a farming situation. The way to value the assets within the partnership most fairly would be for them all to be sold off at public auction but expect strong opposition to this plan, if you manage to get all the assets independently valued it’s probably the best you can hope for. You really do need to see the partnership agreement (presuming one exists)

[scrumpyjack]

I think it likely you need professional advice. If her share of the profits of the farming partnership was 33k in one year, the capital value of her interest in the partnership may be substantial (particularly if land ownership is involved). Also valuing her share may not simply be a matter of her percentage of the total value. It will depend on her rights etc. A minority holding in a private company can often be worth much less than its percentage of the total value because it has no control. It could be a minefield. In our village a local family farming partnership ended up in a lengthy court case between one of the farmer's widow and his sister, reported extensively in the national papers and probably with legal costs into six figures.

[eisman]

In the absence of more information as to the OP's situation, it is difficult to give more specific guidance. However, as a (recently retired) tax adviser with experience of farming partnerships and deceased estates, I can suggest some salient points:

As the legal (co-)Executor of the deceased partner, you effectively stand in their shoes and are entitled to be provided with information available to all general partners, e.g. copies of:
- the partnership agreement (if there is one),
- the farm tenancy agreement (as the partnership owns no land, it presumably operates as a tenant farmer). There may be some capital value due on termination of the lease attributable to tenants improvements made to the land (for example) putting buildings on it. The cost of these improvements may already be reflected in the Balance Sheet, but this may not reflect the full value,
- any documentation pertaining to banking arrangements - any loan agreements, bank charges, bank guarantees, etc.,
- the partnership tax returns, accounts and tax computations (taxable profits do not necessarily equate to the profits shown in the accounts),
- detailed breakdown of the deceased partner's 'capital account' and any 'current account' in the partnership (the capital account shows the capital contributed to the partnership, the current account shows the partner's accumulated shares of accounting profits, less drawings made against their share). Many partnerships maintain only a capital account for each partner, amalgamating the capital and current account.
- the deceased's tax returns for the last four years (see below).

I would suggest you request copies of at least the last four years' partnership accounts and tax computations, since up to four years' tax returns are susceptible to HMRC enquiry (or six years, if the returns are deemed by HMRC to have been prepared 'carelessly').

If there is no written partnership agreement (family partnerships often do not have a written agreement), the default position under the Partnership Act 1890 is that all partners share profits equally and are entitled to equal shares of any capital profits.

As regards the £33K final year profit allocated to the deceased, if the other partner(s) assert there is an informal agreement departing from an equal basis, they need to provide evidence for this (on the principle of 'he who asserts must prove'). Such evidence could include the deceased partner having signed partnership accounts in which an unequal profit share was included. If this is the case, also compare the 'agreed' profit for previous years to check any inconsistency. If the final year departs significantly from previous years, the other partner(s) need to provide evidence that this had been agreed by the deceased.

If the deceased was only drawing £400 per month for several years and her annual profit share exceeded this amount, she is owed the balance of the share of accounting profits, which should be shown in her capital account. The other partner(s) cannot pass a tax liability for a profit share to her without also paying her that profit share.

Hope this helps.

Eisman

[scrumpyjack]

The issue of Agricultural Property Relief for IHT may also be applicable

[flyer61]

Many thanks eisman. You have given me plenty to think about.

[Charlottesquare]

Thanks for the replies.

The situation is difficult and there is as you have guessed a 'history' around this partnership. The CGT has come about because of selling a single Companies shares (which was the principal asset of the deceased). They had to be sold as there was little income for care home fees (the son had ruled out the letting or selling of the house) and no one could predict how long the deceased might live. Obviously having a very large portion of your wealth in a single FTSE250 share is very risky no matter how well the Company has done in the past. It is a blessed relief that they have passed given life was crap for them.

There is a solicitor involved and I have asked the questions however I cannot help feeling I am doing all the work whilst the goose is being plucked.

I am guessing at two things.

1. Load income against his mother from the partnership (she doesn't receive it) but pays the tax on it. I need to understand 'partnerships' and how they work.
2. Given two people are going to inherit their mothers share it is a clear message that I can bugger your personal tax situation about and there is not much you can do about it whilst you are in this partnership.

Seasons greetings to all.

If income is loaded against mother for tax her capital account in partnership is credited with that share of income, one fundamental point about partnerships is the allocation of profits for tax purposes needs to match the actual allocation of profits within the accounts, so if profits are allocated to her and have not been drawn then they are now an asset of her estate reflected in her capital account within the partnership accounts. If this is the case then the two individuals inheriting her estate have therefore inherited a larger share of the partnership.

[flyer61]

Again thank you to all the posters. Not sure if the following question is appropriate for this forum but here goes. For reasons of planning and ongoing tax liabilities the following occurred. The two deceased made the following gifts for grandchildren's school fees.

Looking back at the school payments allocated to parents they were as follows:

Year to 30 June:
Nil - 2015
45,108 2016
50,092 2017
46,201 2018
15,728 2019
18,042 2020

The 2019/20 are allocated to one of the deceased and the previous years are allocated 50/50.

Would anybody hazard a guess as to how much of this is going to feature in the IHT calculation.

I came up with £145171....am I close?

[PinkDalek]

... Would anybody hazard a guess as to how much of this is going to feature in the IHT calculation.

I came up with £145171....am I close?

Mathematically I am sure you are correct but haven’t checked.

Without any more detail, we can’t know if IHT itself is in point.