There are a number of different options when it comes to choosing the business structure which works for your farming business. Consideration of the tax implications of each and whether or not your farm land is to be held by the business or outside of it play an important role in informing any decision about which to choose.
In the majority of cases, a farming business will be run as a Partnership between individuals (often family members) who are involved in the day to day running of the trade. There are however alternatives, each with advantages and disadvantages, and each individual business should be looked at to ensure the most appropriate structure is in place – there is no ‘one size fits all’ and advice on the tax and regulatory regimes should be sought at an early stage.
Often the decision over which business structure to use will be tax-led. Elsewhere in this edition we discuss the importance, from an inheritance tax perspective, of establishing whether or not an asset is owned by the business, or just used by it, but there are also other issues in play, such as consideration of how the profits of the farm are to be taxed, what records need to be kept for the farming business, how public information about the business needs to be, and, crucially, the exposure to liability for those individuals running the business.
In this article we summarise some of the most common business structures seen in farming businesses, and some of the advantages and disadvantages of each.
1.1 General Partnership (GP)
1.1.1 A Partnership (which in this article we refer to as a General Partnership (GP)) exists where two or more parties act in business together with a view to making a profit. No formalities need to be observed for a GP to be created and no written agreement needs to exist – a GP simply exists when the definition is satisfied.
1.1.2 As a result, many farmers may find they are in a farming GP with their business partners (often family members) without having addressed their mind to whether it is the appropriate structure for their particular circumstances.
1.1.3 GPs are very flexible and their governance, the duties of Partners, voting rights for decision making and the split of profits and losses can be determined by agreement between the Partners, usually enshrined in a written agreement. However if there is no written agreement, such matters will be governed by the Partnership Act 1890. A written agreement is therefore almost always advisable as it gives greater control to the Partners. It can also ensure there is clarity over what land and buildings are held as Partnership assets, which is crucial to evidence any possible claim for Business Property Relief from inheritance tax in the future. A written Partnership Agreement is entirely confidential to the Partners who enter into it.
1.1.4 A GP is not a separate legal personality, and all Partners have unlimited liability in respect of any GP debts. This means that Partners’ personal assets are exposed to enforcement of the GP’s debts. This may be an extremely important factor when you have significant assets outside the farming business which you do not want to be exposed to its debts.
1.1.5 There are no requirements to file records of the business on public registers, such as Companies House. There is a clear cost saving here – as well as advantages in terms of confidentiality – which may be very important to some businesses.
1.1.6 A GP is transparent for tax purposes, meaning that its activities are treated as being carried on by the individual partners and not by the GP. The partners are therefore taxed separately on their share of the profits or losses of the GP. Depending on the level of profits, this may be important; it may be disadvantageous for profits to be taxed at an individual’s higher rate for Income Tax, rather than Corporation Tax rates, which will be the case for some of the alternatives discussed below.
1.1.7 The Stamp Duty Land Tax (SDLT) implications of bringing property (i.e. the farm) into the GP in the hope of benefiting from the tax reliefs discussed elsewhere in this edition are often overlooked, at least initially. There are special rules to calculate the SDLT liability, and these also apply when a GP admits a new Partner and property is involved. These rules are complex and the potential liability depends, among other things, upon whether the individual owners involved are connected. If connected, SDLT is not likely to be an issue; however the rules on connected parties need to be checked as there are some pitfalls. For example, non-lineal descendants (e.g. cousins, uncles, aunts etc.) are not considered to be connected to each other and therefore businesses involving such relations need to be particularly mindful and take SDLT advice at an early stage before any significant restructuring is undertaken.
1.2 Limited Partnership (LP)
1.2.1 An LP also exists where two or more persons carry on a business with a view to profit. One difference between an LP and a GP is, however, registration. Unlike a GP, an LP cannot therefore exist without the Partners taking active steps to create it. An LP is however worth considering as a potential business structure as it combines the flexibility of a GP with some of the limited liability of a Limited Liability Partnership (LLP) or Limited Company (LC) (as detailed below).
1.2.2 Unlike a GP (all of whose Partners have unlimited liability), an LP will have two categories of Partner.
18.104.22.168 General Partners, who have responsibility for managing the LP’s business and who have unlimited liability for the LP’s debts and obligations; and
22.214.171.124 Limited Partners, who will invest capital but who will not take an active role in the LP’s operation, and whose liability will be limited to the amount of capital they have contributed.
1.2.3 An LP may therefore be appropriate when someone wishes to invest capital in
the business (whether by cash, machinery or otherwise) without having any exposure to liability over and above that which they have invested – a ‘silent Partner’ of sorts.
1.2.4 An LP is transparent for tax purposes, meaning, as above, partners are taxed separately on their share of the profits or losses of the LP. As above, this may be important when comparing structures and the rates at which the farming profits are to be taxed.
1.2.5 While the LP agreement itself is confidential, an LP does need to be registered at Companies House, with details such as the nature of the business, the names of each of the partners and the amount of capital contribution of each of the partners and whether it is paid in cash or another specified form. A degree of the confidentiality that is enjoyed by a GP is therefore lost. Generally speaking, however, there is no requirement to file accounts or other information at Companies House.
1.2.6 The introduction of land into an LP may trigger a liability to pay SDLT and the considerations relevant to a GP also apply to an LP.
1.3 Limited Liability Partnership (LLP)
1.3.1 Like an LP, an LLP is a separate legal entity to its partners (in this case known as members) however all members of an LLP have limited liability for the debts of the business. The members act as agents for the LLP and are liable only up to the amount they have contributed to it.
1.3.2 As with a GP and LP, an LLP is transparent for tax purposes, meaning that the partners are taxed separately on their share of the profits or losses. As above, this may be important when comparing structures and the level at which profits are to be taxed.
1.3.3 An LLP has similar flexibility as to its governance to a GP, and a written LLP agreement is confidential to its members. However, an LLP has similar accounting, filing and record keeping requirements as a Limited Company (see below).
1.3.4 The introduction of land into an LLP may trigger a liability to pay Stamp Duty Land and the considerations relevant to a GP and an LP also apply to an LLP in the same way as discussed above.
1.4 Limited Company (LC)
1.4.1 An LC is also a separate legal entity. It is owned by its shareholders and governed by its directors.
1.4.2 The liability of shareholders is generally limited to the amount unpaid on the shares held.
1.4.3 Directors are subject to various statutory duties which must be complied with.
1.4.4 An LC is taxed separately to its shareholders and its capital and income profits are subject to Corporation Tax. This may be lower than the Income Tax rates applicable to the members of the business operating through a GP, LP or LLP as discussed above, and often this will be a factor which could potentially outweigh the additional administrative and regulatory burden of running an LC. There are, however, other tax consequences, especially when land and dwellings are involved as set out below, which also need to be considered.
1.4.5 An LC is required to file annual accounts at Companies House and is subject to recording and reporting obligations. The administrative burden and cost of keeping these records, and the fact they are publicly available for all to see, may therefore be off-putting to some, but they are the cost of the limited liability given.
1.4.6 It is important to be aware when considering the introduction of property into a business run via an LC that where residential property is involved a significant SDLT liability of up to 15% may be incurred, depending on the value of the property in question.
1.4.7 Furthermore, if a LC holds a farm including any dwellings then it may be liable to pay additional tax by way of the Annual Tax on Enveloped Dwellings (ATED). Where there is a trust involved, an LLP or LC may be considered the best option, so as to ensure the liability of the trustees is limited, but the specific circumstances need to be considered to ensure the right choice is made.
The potential SDLT liability must always be considered before restructuring of a business where the farm or land and property is involved. However, depending on the potential savings of Inheritance Tax or Income/Corporation Tax which are likely to be enjoyed, the SDLT may be seen as a price worth paying to achieve greater overall tax efficiency.
There are pros and cons of each possible business structure should be considered to ensure you use the one which is best for you, your family and your business.
On all proposed restructuring, specialist legal, accountancy and tax advice should therefore be sought at an early stage to ensure the most appropriate structure is chosen to match your particular concerns and requirements.
This article is from the spring / summer 2020 issue of Agricultural Brief, our newsletter for farmers, landowners and others involved in agriculture. To download the latest issue, please visit the newsletter section of our website.
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The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at June 2020.