One type of planning that can be implemented is incorporating the business into a limited company structure. There are a few common ways of transferring a business to a company and these include transferring the business in exchange for an issue of shares and claiming “incorporation relief” to defer any Capital Gains Tax (CGT), for which strict conditions must be met.

As an alternative, individuals may be able to gift business assets to the company and claim “holdover relief” where applicable to hold over capital gains and sell assets to the company in exchange for an IOU where holdover relief is not available.

Each of these mechanisms to incorporate have their own benefits and drawbacks so advice must be sought before any transfers occur.

What are the benefits of incorporating a farming partnership?

Moving from a partnership to a limited company is a common restructuring method, used for reasons including tax benefits and limited liability.

Limited liability

A company is a separate legal entity, meaning risk is reduced for the individuals involved, whereas partners in a partnership are personally liable for the business’ debts.

Tax efficiency

Company profits are subject to corporation tax (at a maximum rate of 25%), which is usually lower than the higher rates of income tax (of up to 45%). Tax is usually payable when profits are drawn from the company, but individuals have control over how much they opt to draw, introducing flexibility to limit income tax exposure.

Flexible roles

Partners can become shareholders, directors, or both, which allows the business to tailor its set up.

Fragmentation of value

Incorporation involves an individual owning shares in a company which owns the assets. This potentially introduces the option of breaking a controlling holding in a company into smaller pieces through the use of different owners/trusts, and in this case each shareholding can be valued using its own minority discount rate for tax purposes.

Minority discounts are discounts that can be applied to non-control shareholdings to reflect the lack of influence those shareholdings are likely to have, and very generally, the smaller the shareholding the larger the discount. Being able to gift away part of a shareholding therefore potentially unlocks a minority discount being claimed on the retained shareholding, reducing the inheritance tax exposure compared to if incorporation hadn’t happened.

What about when loans are involved?

During restructuring, the handling of existing loans can have significant tax implications, especially regarding “incorporation relief”, which is a relief used to defer CGT on incorporation when conditions are met.

To obtain incorporation relief in full, the only consideration provided to the transferor must be the issue of shares. When incorporating, care must be taken that the lender does not issue a new loan to the limited company, as this can be treated as consideration for the assets, meaning the CGT deferral is not available in full.

To avoid this, the existing loan must be transferred to the company, and HMRC’s Extra-Statutory Concession D32 confirms that the relief is still available in these circumstances.

Don’t forget the finer details

When incorporating certain elections and reporting forms should be prepared to avoid potential unforeseen tax charges.

Capital allowances

The basic rule is that in the absence of any election being made, the transfer of assets such as plant and machinery is deemed to taken place at market value, which can result in a potential income tax charge if the market value is higher than the tax written down value.

An election can be made to transfer those assets at their tax written down value, avoiding a tax charge.

For any property being transferred and fixtures within that property, an additional election is needed under Section 198 of the Capital Allowances Act 2001 to fix the value attributable to those fixtures, allowing the company to continue claiming capital allowances.

Holdover relief forms

An alternative to claiming incorporation relief is to gift business assets into a limited company and claim business asset gift relief to defer the gain, reducing the base cost of the asset for the business.

To claim this deferral, a joint claim for holdover relief must be made by the transferor and the transferee within four years after the end of the tax year of the transfer, with the form then enclosed to the transferor’s self-assessment tax return.

Incorporating a farming partnership presents significant opportunities for tax efficiency and long-term succession planning. However, the process is not without its challenges and so professional advice is crucial to ensure compliance and mitigate risks.