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24 Dec, 2021

Succession when trading through a limited company

When one thinks of succession one is looking at transferring over the business to the next generation. A complication to succession is the emergence of the farming company and the issues it brings up.

No different to any succession conversation the aim is to keep the asset and the business as intact as possible and to ensure financial stability for the ongoing business and even for the person exiting.

When one looks at this there are four options available as follows:

  1. Transfer your business during your lifetime.

  2. Wait until you pass away and transfer it by Will.

  3. Sell your business to a third party.

  4. Redeem your shares in the company/pass over the company.

The reliefs available to the ordinary farmer are very well known in that everyone talks about Stamp Duty Relief for the Young Trained Farmer, Agricultural Relief on the transfer of assets and Capital Gains Tax Retirement Relief for the individual.

A common misconception is out there that there are no reliefs available for those who trade through a limited company.

Reliefs are available for those who trade through a limited company, but they are much more complex, and some of the reliefs may not be available unless properly planned for.

The big difference is that the company now owns the stock, machinery, BPS, and maybe even land.

The shares in the company derive their value from these assets and one is not looking at individual assets in the company but looking at the shares.

If land is owned outside the company this is added into to the mix and complicates the transfer but with a suite of reliefs similar to that of individuals -the overall tax liability can be mitigated.

The reliefs that are available are:

1. Relief from Capital Acquisitions Tax/Gift or Inheritance Tax

Instead of Agricultural Relief being available, a combination of Agricultural Relief/Business Relief may be available. 

Shares in the company do not qualify for Agricultural Relief but may qualify for Business Relief. Business Relief reduces the value of the asset by 90%, similar to agricultural relief, and thus one is only taxed on 10% of the value of the shares.

One must transfer the trading business to avail of the relief.

Are you in control of the company, and is the company a trading company?

If investments have been acquired through a company, the part attributable to the investments will not qualify for the relief.

Restructuring the company may bring about the farmer getting relief and non-farming children taking over a new investment entity.

2. Relief from Capital Gains Tax

No different to an individual relief, CGT is available on the value of the shares passing, providing one meets the conditions of the relief. The main conditions being:

  • Over 55

  • Owned the shares for 10 years

  • Been a full time director for 5 of those 10 years

  • It being a trading company.

Therefore the same reliefs apply to a company shareholder as to an individual, but more complex planning may be necessary.

3. Stamp duty

The one with the largest divergence in how it is treated is Stamp Duty.

Young-trained farmer relief does not apply to the shares in the company.

Duty is payable at 1% on the value of the shares.

It may affect the ability to get a Young-trained farmer exemption on land if trading through a company.

With planning and a review of structure, it may be possible to minimise the impact.

If one fails to get the relief, as long as consanguinity relief remains at 1% of the value of the land being transferred, then whilst costly - it may not be a deal breaker.

What if land has been bought through the company?

A common misconception is that if land is bought through the company one must extract the land to pass it on. One is passing on the shares in the company, which owns all the assets in the company and thus, there is no need to extract the land at all.

What about a build-up of cash within the company, and you want to exit and get access to some or all of the cash?

With proper planning and financial advice, a number of options exist to get the cash out in a tax-efficient manner on exiting /retiring:

  • Payment in pension

  • Tax-free termination payment

  • Company buyback of shares

  • Sale of an asset to the company. This can happen whilst still involved.

As one can see, it is complex but with proper advice, planning and engaging early with all parties, taxes can be kept to a minimum.