In the farming sector, the limited company structure is predominantly found in large profitable Farms. Choosing to incorporate a farm business is usually the last option in tax planning. There are many other tax planning options for farmers before making the big decision to incorporate.
TIMING
If you decide that incorporation is the right choice for your business, you will need to carefully plan the timing of the change in your business structure, keeping a close eye on how this will affect your current and future tax affairs.
You should ideally take a 5-year look at what the savings will be and then decide.
Benefit
Bear in mind that while forming a limited company can help profitable farm businesses retain cash, accelerate loan repayments and expand, the structure is not necessarily suitable for everyone. Farmers currently paying the lower rate of income tax are unlikely to benefit from incorporation.
Rising profits can be a reason to consider forming a limited company if other tax planning opportunities have been exhausted. Likewise, on large scale beef and tillage farms where while profit on a per animal/acre basis may be low, overall returns can be high, incorporating may be worth considering. On profitable farms and/or where you are in the higher income tax band, forming a limited company can be a way to reduce your tax bill. However, this option should only be considered if you have taken advantage of all available tax-saving opportunities within your current structure and have explored the potential benefits of a partnership.
Questions to Consider
Before making your decision ask the following -
• Will you continue to be liable for the top rate of income tax on an ongoing basis?
What investment are you planning?
• Do you envisage any future expansion or ownership changes?
• Are you claiming all relevant individual and/or partnership allowances? Are family wages being maximised?
Current and potential future profits, capital investment plans, pension requirements and succession plan also need to be taken into account.
Remember that you will need to update your Will if you decide to change your structure.
This is very important because the change in business structure can affect the ownership of assets.
It is essential to take professional advice when contemplating incorporation as this is not a short-term option.