Most businesses start out life as a partnership but may later become limited companies, usually because the business has grown significantly. Fully incorporating the business, by transferring it to a limited company offers substantial annual tax savings. Company corporation tax rates are 20% compared to personal income tax rates of up to 47%. Therefore, for a two partner business making profits of say £300k a year the annual tax saving could be in the region of £60k.
However, whilst the annual income tax savings seem very attractive there are many other aspects which need to be considered.
Any money drawn out of the company for personal expenditure needs to be taken as salary, dividends, rent or against a loan account. Therefore, those that draw substantially from the business are still likely to have an income tax bill.
The ownership of property going forwards will need to be considered as there is potential capital gains tax and stamp duty land tax charges on transfers to a company. The farmhouse would no longer qualify for principal private residence relief, on a future sale, if it is transferred into the company. In most cases it is likely to be more beneficial to retain the assets outside the company.
Where the partnership has existing borrowing it will be important to involve your bank manager in discussions early on. Whether these are transferred to the new company will depend on whether this might cause a re-negotiation of the existing agreements with the bank. If borrowings are kept outside the company, financing the capital and interest payments may reduce the annual tax savings first envisaged.
There are also some inheritance tax disadvantages when running the farming business through a limited company and these will need to be considered and other tax planning action may be required. In addition there will be benefit in kind charges on motor vehicle and household expenses that have historically been paid by the farming partnership with a proportion of the VAT reclaimed.
The decision to change the business structures is not an easy one and careful consideration of all the factors will be required before finding the right structure for your particular business. Full incorporation is one of the options and for profitable farms which invest heavily back in the business it is likely to be one of the best, despite some of the hurdles.