IHT, farm succession and avoiding farm partnership disputes
It has been announced by HMRC that the results of an All-Party Parliamentary Group report concerning inheritance tax on farms could find its way into legislation in the future. This means there has never been a more-timely reason for farm tax planning and legal succession issues to be reviewed and documents updated if necessary. Two important new cases highlight the significance of this and just how essential it is to forward plan.
The first case involved a son’s claim that he was promised a share in the farming business. The claimant worked on the family farm for 30 years at a very much reduced wage which he was prepared to accept, on the basis of assurances made to him by his father, that he would one day inherit the farm.
Reliance on promises made can give rise to the ancient right of proprietary estoppel which operates where one party has been induced to act because of a promise made by another party and that other party has then sought to renege on that promise.
The Court of Appeal upheld the son’s claim on the basis that it would be unconscionable to allow his father not to honour his promise. The facts of the case could be considered familiar in farming terms where parents make promises to one of their children that they will inherit the family farm at some time in the future. History tells us the farming child relies on those promises and forgoes alternative opportunities and works long hours for very little money in the hope and expectation that they will receive their reward in due course.
In the second legal case, the parties had entered into a written Partnership Agreement which they thought would settle any dispute over the future ownership of the farm but it was the interpretation of the agreement at the centre of the dispute. The couple who owned the farm had three children but only their son worked in the farm business. He was subsequently made a partner with his parents on a 50/50 basis. First, his father retired so he was then in partnership with his mother and subsequently, after his parents divorced, his mother served notice under the Partnership Agreement of her intention to retire and at that point she claimed 50% of the value of the farm. The son defended the claim by his mother and counter claimed on the grounds that his parents had promised that he would inherit the entire farm after they had both died.
The Partnership Agreement was closely scrutinised and the court found in favour of the mother and said that as the son had signed the Partnership Agreement in the full knowledge of its contents, which had been explained to him by his own solicitor, he could not rely on any of the promises that had been made to him before the Partnership Agreement was signed. His claim failed and he was obliged to pay his mother half of the value of the farm.
Farming families should hold full and frank discussions with each other about the future of the farming business and succession planning. Partnership Agreements should be put in place or carefully reviewed coupled with the full tax planning implications of any changes of ownership calculated. Such discussions may be difficult to have at the time, but they are vital to head off potential litigation in the future.
Once the tax position arising from decisions has been made, it will encourage all those involved to engage with and understand their legal position with sufficient clarity to enable written documentation to be arranged to avoid future disputes. And if you are made a promise of an inheritance, make sure you get it in writing as these recent cases demonstrate only too well.
To review your farm succession and IHT plans, please contact our team here.
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