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Land used by farming partnerships can be held as partnership property or held outside of the partnership. Which option is best will turn on individual circumstances, but when land is brought into a partnership as partnership property it must be used by the partners exclusively for the purposes of the partnership.
Before transferring land into a partnership, it would be prudent to take advice and ensure there is a well-drafted partnership agreement in place so that the individual positions of the partners are protected.
In this article we consider the consequences of holding land within a partnership.
Legal v Beneficial Ownership
It is important to note the distinction between the legal and beneficial ownership of land assets. The legal owners are those named on the deeds or on the registered title at the Land Registry. If land is owned jointly, they hold the freehold interest on a trust of land for the beneficial owners, who may not be the same people as the legal owners. If land is held as partnership property, the land is held on trust for the partnership and the individual partners are the beneficial owners. This may not be immediately apparent on the face of the legal title, and it is important to consider the basis on which the legal owners may be holding the land assets.
Transferring land into a partnership
To transfer land to a partnership it is not necessary to transfer the legal title: the legal owner(s) can instead declare that they hold the beneficial interest on trust for the partnership, with the legal title remaining in their name(s). The legal title cannot be held in the name of the partnership itself, because a partnership is not a legal entity in its own right (unlike a limited company, for example) and so cannot ‘own’ anything in its name.
Consequences
Once the land becomes partnership property, the nature of the asset changes and there are several issues to be aware of:
- The legal owners now own an interest in the capital of the partnership which corresponds to the value of the underlying land assets: they no longer have any direct ownership rights or proprietary rights in the land itself.
- The land is now being farmed and used for the benefit of the partnership business and is at risk from the partnership’s trading activities in the same way as the other partnership assets.
- Landowning partners cannot take assets out of the partnership ‘in specie’ (i.e. the land assets themselves) without the consent of the other partners. Following dissolution, the land is available to meet the demands of creditors, with any surplus distributable between the partners in accordance with the terms of the partnership agreement. The debts and liabilities of the partnership will be paid in preference to the re-payment of the partners’ shares.
- The partners are not able to make specific gifts in their Wills of land which has been introduced to the partnership, as they do not hold an interest in that land, but instead an interest in the capital of the partnership. They can bequeath the value of their partnership shares via their Wills, but not the underlying assets themselves. However, any such bequest must reflect the terms of any partnership agreement.
The partnership accounts should clearly show how land assets are held. Best practice is to give each landowning partner a separate land capital account and allocate property (and its associated value) to it. The property is still a partnership asset and thus “at risk” but it allows the partnership to allocate the underlying capital (and profits and losses arising from it) to specific partners in agreed shares. The land capital account is distinct from a partner’s general capital account (which deals with working capital).
Conclusion
It is important to have clarity on whether a land asset is partnership property, for the reasons outlined above and because of the significant impact it can have on the partners’ tax and succession planning.
Whilst it is sometimes difficult to unpick the position, it is a vital exercise to ensure that ownership of the underlying assets is properly understood, and any opportunities to change the partnership structure or the underlying ownership of assets are maximised. This is particularly pertinent since the October 2024 budget, given the upcoming changes to Inheritance Tax reliefs.
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