The financial issues that arise when a couple reach the stage of divorce are never easy to resolve. When those issues involve a farming partnership the division of assets and the need to meet the financial requirements of both parties can quickly become a complex case.
The start point for any effective negotiation in a divorce settlement which involves a farm is to understand the business of the farm clearly. The more questions that can be asked the greater the understanding will be. However, there are numerous questions that could be asked. For each answer there are probably four more questions to follow.
The following is an example of some of these questions and acts as a guide to what you can expect to be asked during your divorce process.
- Is there a formal partnership recorded in a partnership deed? If so, is this properly reflected in the annual accounts, including in respective capital accounts?
- Has the farm been in the family for generations? Or have the couple purchased and built up the farm (in whole or in part) during the marriage?
- Who takes what amount from the farm income? Is there an element of automatic reinvestment of capital or income into the farm? If so, will this affect whether the farm becomes a marital asset in part or in full?
- What items of live and dead stock need to be valued? Can they be listed (along with details of any financial obligations relating to each)? Or is there a need to examine the stock movement books?
- Are there any intangible assets to value such as a single farm payment? What is the up to date position given recent changes?
- Does any property or land need to be valued, who owns them (bearing in mind a partnership is not a separate legal entity so cannot hold land itself) i.e. it will be in the names of individuals.
- Are any mortgages or borrowing facilities secured against which assets and what are the balance fluctuations over an annual period?
- Are any of the properties subject to tenancies or agricultural restrictions, covenants or access issues?
- Do other partners to the farming partnership need to be considered? Will they be adversely affected by the divorce? If so, do they need separate legal advice as to their own position?
- Is there any diversification on the farm which constitutes a separate trading entity e.g. holiday lets?
These are just the tip of the iceberg when it comes to questions concerning a farming partnership in the divorce process. The list of questions is endless and proper advice is necessary at a very early stage.
Farms that have been passed down from generation to generation rarely have all the documentation and legalities in place to give an entirely clear picture. If there is any risk of future divorce it is imperative that the farm, and its partnership, is properly organised and legally documented. Sometimes preventative legal advice and accountancy action is needed to avoid future claims. It can also save time, disputes and significant cost at a later date should a divorce arise. In the worst scenario family members may have to intervene in the divorce proceedings to safeguard assets for the future.
How can tax implications be minimised in a divorce which involves a farming partnership?
Given the value of farming assets, it is essential to consider the tax implications in a divorce. If any land or buildings, over and above the family residence, need to be transferred between spouses, there may be a benefit in delaying the separation or formal proceedings until the next tax year. It is often beneficial to everyone for there to be full cooperation between the separating couple to mitigate taxation and claim any available reliefs. It may be that the historic details of when assets were acquired and at what price will be needed so digging back over past documents might be necessary.
Before a settlement is reached consideration will have to be given as to how money can be raised in order to meet the claim on divorce. Can money be raised from the bank against land? Will land have to be sold? If so, will that effect the income of the partnership thus affecting the valuation? Can the settlement be structured so that payment is given over a number of years? It is essential that couples receive experienced accountancy advice alongside legal advice. This should be done prior to finalising the settlement if tax is to be limited.
The manner in which the farm is operated, documented legally, and recorded in the accounts is important. Understanding in advance how the farm could be affected by a divorce is key if claims are to be minimised. It could be that not to do so could adversely affect the division of assets in the event of a marriage breakdown. Equally instructing a divorce solicitor who does not understand the particular issues that arise when a farm is involved could result in an outcome which is unfair, impractical or wrong for everyone.
For more information about how a farming partnership is divided in a divorce, please contact our Family Law team on 0161 475 7676.
You can also read more on this topic in our previous blog: “How is a Family Farm Divided in a Divorce?”