Incorporating the family farm – a dead duck?
November 20, 2013
Some farms took the option of incorporation many years ago in order to secure the benefit of lower tax rates on retained profits and, in some cases, the ability to devalue agricultural property by establishing a corporate tenancy.
Times have changed and in the last generation we have seen advantageous rates of inheritance tax (IHT) relief on agricultural land coupled with more aggressive taxation of benefits in kind which have tended to make incorporation less attractive.
At the moment the pluses and minuses of incorporation are as follows:
Reasons to incorporate
• Headline tax at 20 – 23 per cent rather than a maximum of 45 per cent plus National Insurance contributions (NIC)
• Flexibility in distribution of profits to family members
• Can devalue underlying land for tax purposes
Reasons not to incorporate
• Ultimately double taxation of capital gains
• Element of public disclosure
• Employers NIC on salary
• Problems with benefits in kind, particularly on the farmhouse
• Issues with overdrawn directors loan accounts
• Disincorporation can be difficult and expensive – the recently announced disincorporation relief is unlikely to be of assistance where there are significant land values
• IHT reliefs can be less attractive
On the face of it, the disadvantages outweigh the advantages, but certainly any business contemplating this avenue should look at a comprehensive review of the inheritance tax position (an agricultural and business property relief audit) before proceeding.
An alternative idea which some clients have found advantageous is that of partial incorporation.
Every case is different, but the general approach is to identify a profitable part of the business which can be wrapped into a new limited company without necessarily transferring significant amounts of farmland. Ideally the new business will take over as much borrowing as possible and it can then repay that borrowing out of profits which typically will only have been taxed at 20 per cent. The advantages and disadvantages of partial incorporation:
• Lower tax rates
• Main holding may obtain some protection from riskier enterprises
• Different parts of the family can see their element of the business in isolation
• Grandparent trusts can be included as part of the longer term process
• May give a small improvement in the capital allowance position
• More paperwork
• Some public disclosure
• Greater professional costs
• In time assets will build up in the company (but can be withdrawn by dividends in a bad year or, ultimately, on liquidation)
In conclusion, partial incorporation is not for everyone, but if the circumstances are right it can certainly tick several boxes.