Incorporation - Is it still worth it? Other aspects

When you incorporate your business, it becomes a separate legal entity. As a result, your personal assets are protected from business debts and liabilities. If the company faces financial difficulties, your personal assets remain protected outside of the company. However, that is unless you have acted negligently or fraudulently, in which case the corporate veil, as it is known as, is removed and the directors can be found personally liable.

Whilst the shares of a trading business would qualify for Business Property Relief (“BPR”), the value of a Director’s Loan Account is chargeable to Inheritance Tax (“IHT”).

Also, where assets are held outside of a company, but used in the company for the trade, only 50% Business Property Relief(BPR) may be available on the value of that property. Whereas 100% BPR may be available on property used in a trade through a sole trade or partnership structure.

Farmland, however, would still obtain 100% Agricultural Property Relief (“APR”) on the agricultural value, even when held outside the company.

If the land and buildings are transferred into the limited company then BPR could be increased to 100%, however there would be stamp duty land tax and potential capital gains tax implications of making such a transfer. Also, once the property is owned by the company it would be very costly to extract it again and there would be greater tax implications if the property were to be used again personally.

There are additional costs in running a limited company.

Disclosure of statutory accounts and ownership details are required to be submitted to Companies House where it is then also publicly available. In addition, this information is soon to increase, with Companies House wanting more transparency. This will involve reporting your profit and loss details on public record at some point going forward.

Benefits in kind (“BIK”) - When operating as a company, any personal costs paid for by the company, such as car expenditure, or benefits received from the company, would give rise to a BIK. This is then taxed on you personally, with the company paying taxon this as well.

Annual tax on enveloped dwellings (“ATED”) - may be due if a company has a beneficial interest in residential property valued over £500K. However, where property is let commercially or used in a trade, relief from ATED can be claimed.

In summary, incorporation is never a one-size-fits-all solution. When considering incorporation, it is therefore important to understand not only all of the tax implications, but to also consider the additional points above, to help decide upon the structure that aligns best with your business and personal needs both now and in the future.