As more farms and rural businesses diversify, we frequently discuss with clients the merits of holding the new activity in a company.
The most popular reasons why a farming business would become incorporated are:
- Limiting shareholder liability – although directors can risk criminal or civil penalties if things go wrong.
- Minimising tax liabilities – rates of Corporation Tax (19%) being well below Income Tax rates of 40-45% plus National Insurance Contributions.
There are however many other factors to consider:
- Whether or not premises transfer into the company needs careful consideration. If premises remain outside, take tax advice regarding any rent paid. If transferred in, will Stamp Duty Land Tax be due?
- The bank must be consulted early on and, if there are borrowings, a formal tenancy over personally owned property may be required to reassure the bank, and perhaps charges and personal guarantees.
- Careful cashflow and tax planning is needed to ensure cash is available in the desired/intended hands at the right time, without suffering excessive rates of tax.
- Advice may be needed regarding the VAT position of any property.
- Transferring assets into a company with the same ownership does not usually trigger an Inheritance Tax liability.
- As an employee/director of the company, it should be possible for the company to make pension contributions (subject to limits) to a registered fund irrespective of the salary level. In contrast, pension contributions are a private expense for sole traders or partners with relief claimed on personal tax returns. Where income is from non-trade sources (e.g. property rental), a company can offer greater scope for pension contributions.
- A business owner may move funds to and from an unincorporated business without tax implications. When a company is involved there may be tax implications of these transactions, particularly if the company lends to the director. If the director lends to the company, interest can be charged.
- The share structure of the company offers various tax planning opportunities to ensure tax efficiency now and in the longer term.
If an existing trade will cease, to be carried on by the new company, more factors come in to play:
- Can tax efficient payment of mixed business/ private costs be made without having to report cars and other costs as Benefits in Kind? This would trigger Class 1A National Insurance Contributions and Income Tax on the employer and employee respectively.
- Future profits and losses are within Corporation Tax rules, not personal Income Tax, restricting offset. Unused personal losses cannot be carried forward to offset against future company results.
- There is some flexibility surrounding the value at which plant and machinery transfers into the company for tax purposes, and similarly trading stock.
- Will the transfer of trade trigger a Capital Gains Tax liability? If so, there are reliefs potentially available which defer the Capital Gains Tax.
- The date the old business ceases could have a significant impact on personal Income Tax positions, due to Overlap Relief.
- The company will survive the death of any particular director or shareholder, enabling long term planning and greater commercial credibility.
- Effective ownership of the business may be more readily transferred, and shared across the wider family, perhaps using different classes of shares and a formal shareholder agreement to optimise the tax position and also ensure clarity and fairness.
There may be a number of good reasons for considering the use of a company for your rural business as part of a tax planning strategy. However, as you can see there are many factors to consider. As the UK’s leading farming accountants We would welcome the opportunity to talk to you about your own specific circumstances.
If you wish to get more information on this please speak to your usual Ellacotts contact or contact Helen King on firstname.lastname@example.org or 01295 250401.