Updates on Incorporating Your Farm
Author: Rhys Jones, LHP Associate Director
The majority of our farming clients and indeed farming businesses, in general, operate as sole traders or partnerships. Many of you will however know those trading as a limited company, or are wondering whether such a structure would be more suited to your circumstances. This blog looks at 3 important factors to consider, before incorporating a farming business.
When incorporating is a good idea
For most, trading through a limited company only becomes an option worth considering when the level of trading profits being achieved means that the individual or partners concerned are regularly being taxed at the higher rate of tax, currently 40%.
This is especially the case where the farmer is keen to re-invest any surplus cash in expanding the farming business and therefore other tax saving solutions, for example, using that cash to make private pension contributions, become less appealing.
Trading profits generated within a limited company are currently taxed at a corporation tax rate of 19%. This is lower than the equivalent rate of income tax and national insurance, payable by a higher rate taxpayer trading as a sole trader, or within a partnership. In order to draw cash from the company bank account, dividends would need to be voted, but the ability to manage the level of dividends paid during a tax year, means that the higher rate of tax can be avoided.
Also consider these three factors…
1. Consider changes ahead
From April 2023, the corporation tax rate for companies with profits of £250,000 or more will rise from 19% to 25%. Companies with profits up to £50,000, will continue to be taxed at 19% and there will be rates from 19% to 25%, for businesses that fall between the thresholds.
For the 2-year period between 1st April 2021 and 31st March 2023, farmers trading through a limited company will qualify for a ‘super deduction’ tax relief of 130% of the cost of new plant and machinery. This new relief is not available to sole traders and partnerships, although they are still able to claim 100% of the cost of plant and machinery up to £1m per annum, via their annual investment allowance.
2. Consider other reliefs available for limited companies
As well as the super deduction tax relief, farming businesses trading through a limited company also have access to research and development (R&D) tax credits, a tax relief designed to encourage spending on research and innovation.
As with the ‘super-deduction’ discussed above, these tax reliefs are not available for sole traders or partnerships, but they are extremely generous. They allow companies to deduct an extra 130% of their qualifying research and development costs from their yearly profit, on top of the normal 100% deduction, to make a total 230% deduction. Farm expenditure that could qualify for R&D tax credits includes:
- selective breeding to improve genetic traits
- reducing antibiotic usage
- investigating alternative ways to reduce the spread of disease
- initiatives to reduce the environmental impact of farming
For a farmer looking to expand the business and use innovative methods to do so, trading through a limited company would therefore appear to be an attractive option.
3. Consider balance against other tax implications
However, as always, things are never so straightforward, mainly due to the need to consider the other taxes at play in the longer-term. These include capital gains tax due on disposal of land and also the preservation of inheritance tax reliefs, such as agricultural property relief (APR) and business property relief (BPR).
For the above reasons, as a rule, it is better to hold the farmhouse and land and buildings outside of the limited company. However, even when this is the case, under current legislation, a farming business trading through a limited company (but with the land held in the farmers own names outside of the company), still loses some of the reliefs available were they trading as a sole trader, or partnership.
In terms of inheritance tax, agriculture property relief (APR), should still be available at 100%, but it is important to remember, this only covers the agricultural value of the land. For any value in excess of the agricultural value (e.g., hope or development value) to be covered, the farm needs to qualify for business property relief (BPR).
Land held outside of the company, would only qualify for BPR at a maximum rate of 50% and in fact, there would be no BPR at all if the land is owned by a minority shareholder (less than 50%). In contrast, land jointly owned within a partnership structure, could qualify for BPR at a rate of 100%.
Another factor to be considered, is – although the UK’s inheritance tax rules have not changed for many years, there is potential for significant change over the next few years. Indeed, in 2020, All-Party Parliamentary Group (APPG) published their report ‘Inheritance and Inter-generational Fairness’ and within their many recommendations, was a recommendation that APR and BPR be abolished.
To summarise, incorporating is not a decision to be taken lightly and your individual circumstances need to be considered carefully. The potential short-term income tax savings and availability of research & development tax credits from trading within a limited company need to be balanced against potential loss of some inheritance tax reliefs.
Why not get in touch with our team of farming specialists at LHP. We have offices across South West Wales, including Lampeter, Carmarthen, Haverfordwest, Tenby and Cross Hands – and we are here to help you thrive, adapt and grow in business. Email firstname.lastname@example.org or ring 01267 237534.