Farm partnership – how do I avoid being left with nothing?

The answer

Farm partnerships have become a common structure for farming enterprises, particularly where a new or young farmer wants to become actively involved. You do not need to own the land, or have a guarantee that you will eventually own it, to build a valuable farming business. However, a 50:50 profit share alone may not adequately protect the money you invest or the years of work you contribute.

A properly structured Farm Partnership Agreement and On Farm Agreement are therefore essential. The Farm Partnership Agreement should set out what each person contributes, what assets they own and what each partner will be owed if the arrangement ends. The On Farm Agreement should cover the day-to-day operation of the farm, including duties, working hours, decision-making, drawings and how profit shares may change as responsibilities change.

Your accountant should also maintain a clear partnership capital account. Money you invest can be recorded as an increase in your capital account or as a loan owed back to you, with repayment terms agreed in advance. Similarly, livestock and machinery brought into the partnership should have agreed opening values and clear ownership.

Particular care is needed with buildings and permanent improvements on land you do not own. Before investing, agree who will pay, who owns any removable assets and what compensation will apply if the partnership ends. I would not fund a major development on a promise to “sort it out later”.

A lease and partnership serve different purposes. A lease provides rights to use the land, while a partnership determines how the farming business is owned and operated. A short lease can provide a trial period but offers less security for long-term investment. A longer arrangement provides greater certainty but should include clear provisions for early exit and capital expenditure. In either case, substantial investment should be supported by enough time to recover the cost or a clear compensation arrangement.

The agreement should also address what happens if either partner wants to leave, becomes seriously ill or dies. This should include how livestock, machinery, cash, debts and other assets are valued and divided, who can continue farming and how an outgoing partner or their beneficiaries will be paid.

The proposed 50:50 arrangement can also change over time. For example, you could agree in advance that the split changes after a certain number of years or when you leave your off-farm employment. Each partner is taxed separately on their share of partnership income, so your accountant should model the after-tax position for both parties, particularly where one partner also has PAYE income. Registered Farm Partnerships may also qualify for enhanced stock relief where the relevant criteria are met.

Before proceeding, prepare a five-year cashflow covering normal trading, a poor farming year and an early exit. Include a realistic value for your time, tax, replacement labour and the amount you could actually recover from any improvements.

Ultimately, the key is to agree these issues at the beginning. A simple outline setting out the expected investment, rewards and payback can provide a useful starting point before engaging experienced professionals to prepare the formal agreements.