Incorporating your farming business: is it the right move?

We are often asked about the pros and cons of running a farming business as a limited company; Incorporation can offer significant benefits, but it also brings legal, tax, and administrative changes, as well as implications for succession and inheritance tax planning.

Why consider incorporation?

The question often arises due to the potential for tax savings. The current corporation tax rate (25%) is lower than the higher bands of personal income tax (up to 45%) paid by sole traders and partnerships. This means that profits retained in the company, rather than drawn as salary or dividends, are taxed at the lower corporation tax rate.

However, it is important to note that money in the company is not your personal money. Withdrawing funds, whether as salary or dividends, will typically trigger further tax charges. Therefore, the actual tax savings may be less than initially perceived.

Incorporation is generally more beneficial if:

• You are already paying higher rates of income tax.

• You do not need to draw all profits from the business immediately.

• You intend to reinvest profits into the business.

  
  

What are the advantages?

As a limited company is a separate legal entity, your personal assets are generally protected. That said, if you provide personal guarantees on company loans, this protection may be reduced.

Other potential advantages include:

• Improved credibility with banks and suppliers.

• A clearer structure for joint ventures or contract farming arrangements.

• The ability to gradually transfer shares to children or successors without breaking up the business.

• Easier division of ownership among family members through share allocation.

  
  

And the disadvantages?

There are also some important drawbacks to consider:

• Increased complexity and administrative costs, including:

  • Annual accounts filing at Companies House (which are publicly available).

  • Annual Confirmation Statements.

  • Maintaining a separate business bank account.

• Legal responsibilities: Company directors must comply with the Companies Act 2006 and act in the best interests of the company.

• Contract updates: You may need to update your:

  • RPA account

  • Farm insurance

  • VAT and PAYE registrations

  • Tenancy agreements

  • Loan and hire purchase agreements

    
    

Incorporation must be carefully structured to avoid unexpected tax consequences. Risks include:

• Loss of Agricultural Property Relief (APR) or Business Property Relief (BPR).

• Capital Gains Tax (CGT) liabilities on asset transfers (though reliefs such as incorporation relief or holdover relief may help defer this).

• Complications if land is owned personally but farmed by the company as this can restrict APR.

  
  

What about inheritance tax?

Business Property Relief (BPR) for Inheritance Tax may still be available on company shares if:

• The company is a trading business, and

• The shares have been held for at least two years.

  
  

However, if land is held outside the company and simply used by it, there is a risk that Agricultural Property Relief (APR) may be restricted.

Final thoughts

As you can see, incorporation is not a straightforward decision. It depends on many factors and should be tailored to your business’s specific circumstances. Poor structuring can have long-lasting tax consequences, so proper advice is essential.

If you are considering incorporation, we would be happy to help you assess the implications for your farm business.