Farming companies became popular in the 1950s when they provided a route to reduce the value of land for what is now inheritance tax. There are still many companies in existence where the land is owned by the shareholders but subject to Agricultural Holdings Act Tenancies in favour of the company.
Since the companies were incorporated, the landscape has changed in so many ways. The compliance and tax costs of companies are increasingly burdensome. Since the 1980s, there are benefit in kind charges on the occupation of farmhouses and car benefits. More recently, Annual Tax on Enveloped Dwellings has become another burden; even if only an administrative burden where relief is available.
Overdrawn directors loan accounts, employers’ national insurance on salaries and benefits all add to the cost of a company.
Should the company make a loss, the losses are ring-fenced and cannot be used against other income assessable on the individuals.
The most recent budget is pushing up the rate of corporation tax from 19% to 25% for companies with profits over £250,000. The date of implementation of the new rate is 1 April 2023.
Where profits fall between £50,000 and £250,000, the tax rate will be 25%, but companies will be able to claim marginal relief. The profit limits will be divided by the number of associated companies (not the number of 51% group companies). The definition of an associated company includes companies owned by close family members.
If the company is not trading, for example if it is letting all of its land, then the rate of tax will be 25% for all profits.
Winding up a landowning company can be very expensive as there will be corporation tax on all of the gains on any assets owned by the company as well as capital gains tax on the gains on the increase in value in the shares owned by the individuals.
Are there any positive reasons to retain the company?
There are several reliefs which are only available to corporate vehicles:
- 150% relief for qualifying expenditure incurred by companies in cleaning up contaminated land acquired from a third party in that state. For example, clearing a building of asbestos will qualify for the relief.
Research & Development
- Small and medium sized companies (nearly all farming companies) are able to have a 230% deduction for every £1 spent on qualifying expenditure. The 2021 budget has introduced some changes including a limit of £20,000 plus 300% of its total PAYE and NIC liability for the period. Expenditure on developing or adapting machinery, or a new feeding method could qualify as R&D.
Enhanced Capital Expenses
- A super-deduction providing a first-year allowance of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances;
- A first-year allowance (FYA) of 50% on most new plant and machinery investments that ordinarily qualify for 6% special rate writing down allowances.
In disposal of a super-deduction asset, the proceeds will be grossed up to 130% and treated as a balancing charge, rather than being deducted from the general pool. Disposals of 50% FYA special-rate pool assets will similarly give rise to a balancing charge.
For an active investing trading company, the new reliefs are extremely valuable and favour a corporate vehicle.
Another aspect to consider is passing down the value to the next generation.
From a capital taxes perspective, passing down value to the next generation, can be easier for a company.
From a capital gains perspective, provided that 80% or more of the assets relate to trading and not investment activities, holdover relief will be available to defer any gains on shares.
If the investment assets exceed 20%, for example as the result of the company having let cottages, value can still be passed down, but more care is needed.
For an Inheritance Tax purposes, provided that the company has less than 50% of its activities involved in investment activities, the shares can qualify for Business Property Relief. Shares can be used to pass value down to the next generation without giving rise to gift with reservation problems which can arise on gifts of land or interests in partnerships. Where Inheritance Tax and distribution of value amongst family members are issues a company can be a more flexible vehicle where value can be given to family members without losing control.
In summary, companies have extra compliance costs for the year, corporation tax rates are rising, but the there are other advantages which are only available to companies. As always, there is no one answer – every situation and family is different.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.