Media
What does family law have to do with rural business?
Family law may seem to have little to do with a farming business, but the reality is often very different. Families often run businesses together, and agricultural businesses are no exception, with many farms passing from one generation to the next. When family members marry, or sadly divorce, this can pose real challenges for a farming business. Considering how a family farming business is set up may help avoid complex asset division in the event of a divorce.
Matrimonial Assets
Under Scots Law only matrimonial assets acquired during the marriage are divided between both parties. Assets each individual has inherited or received as a gift from a third party are excluded. However, if these assets have changed in structure or nature, as is often the case for tax efficiencies, problems may arise.
Tax efficiencies can create matrimonial assets
Following a marriage, Accountants often advise their farming clients to form partnerships with their spouses to help minimise their tax liability. Such partnerships change the structure and nature of the farming business, inadvertently converting what were previously non matrimonial assets into matrimonial property. If the marriage subsequently breaks down, the assets will be divided between the couple, this may have significant consequences for the family farm, particularly if other members of the family have a share in the business, for example as a partner or landowner. Additionally, it is often the case that the younger generation hope or expect that the farm will pass down to them. Although in many cases they have no legal entitlement, it is common practice to pass on a farm within a family. The prospect of the younger generation not following in the family footsteps as a result of a separation or divorce can create tensions at an already difficult time.
Other considerations
Land is gifted frequently by parents to their children and, when doing so, care should be taken when considering the creation of a loan account. This allows an income to be paid to parents in a tax efficient manner after the land has passed to the children. Although gifted property is excluded from the definition of matrimonial property, by creating a loan account, the land may be viewed as being transferred ‘for a consideration’. This may convert the land into matrimonial property. This area of the law is complex and care should be taken when tax planning.
Pre-Marriage Contracts may help
In these circumstances, whilst not very romantic, we recommend putting a pre-marriage contract in place. They can be a very useful mechanism which can protect a family farm in the event of separation or divorce. Such contracts can ‘ring-fence’ the inherited or gifted assets to hopefully protect their value if a marriage fails. It is generally accepted in the family law community that pre and post marriage contracts are likely to be legally binding in Scotland. However, because the agreement will be relied upon in the future, there is no guarantee as to how the law may develop in the future.
Partnership Agreements
Another way to safeguard family assets is to review the terms of the partnership agreement, which may have been drafted historically. If there is no partnership agreement, a forthcoming marriage is a good time to consider putting one in place. A partnership agreement can govern a number of matters including how to reach decisions, how to divide profits and, crucially, in which circumstances and how to dissolve the partnership.
Clarity and Protection
Farming and family law are often closely entwined, and if relationships falter, they can be difficult to separate. Forward planning in a practical manner can help provide clarity and protection for all members of the family and business.
If you would like to discuss the current structure of your farming or rural business our Family Law Partner, Faye Donald, and Land & Rural Business Solicitors Ian Angus and Anna Moir are happy to help. Find out more about the land and rural department here and the family department here or contact us on 01224 332400.
