Multiple business entities and property or asset transfers
It’s not unusual for farming businesses to be structured to have operations running through multiple entities, including partnerships and limited companies.
Having operations running through a limited company may be an attractive option, as it can provide limited liability for business owners and opportunities to defer or reduce tax on profits. Extraction of profits from a company does, however, generally subject those same profits to a second tax charge, which could mean that the tax saving isn’t as great as it would first seem.
Here are some key considerations if you’re thinking of transferring property and/or assets from one business entity to another.
Profits and cash extraction
Business owners can extract profits from a company by various methods, including salary and dividends. Income tax (and possibly National Insurance contributions (NICs) in the case of a salary) will be paid on receipt of a salary or dividend above the personal allowance and/or dividend allowance. Salaries, employer’s NICs, and pension contributions are usually deductible business expenses, which will reduce the taxable profit of the company. Conversely, dividends are paid from post-tax profits and will therefore not attract a corporation tax deduction. In determining what is the most tax-efficient method, the tax position for the company and the individual should be considered together.
There could, however, be another way of extracting cash from the company. Consideration should be given to the assets owned and where these assets sit within the operating structure. For example, in many cases there will be buildings or other assets owned by a partnership where the business may have originated, but which are now used by the company, for example.
It could be favourable for such assets to be sold by the partnership to the company, providing cash funds to the partnership which can then be withdrawn from the partnership by the partners. In the right circumstances the effective tax rate of the transaction can work out lower than the more conventional methods of withdrawing profits, as mentioned above.
There are various taxes and costs that should be acknowledged before undertaking any transaction like this.
Here are the main areas to consider.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is payable by the purchaser when there’s a transfer of ownership of land or property in exchange for ‘chargeable consideration’, a term which includes the assumption of debt secured on the property.
Special rules mean that a transfer of property from personal ownership to a limited company, which is ‘connected with’ the transferor, will be deemed to be a disposal and purchase at market value, regardless of any actual consideration paid for the property.
SDLT calculated on agricultural land and property should fall under the non-residential rates, which are 0% up to £150,000, 2% on the next £100,000 and 5% on the remaining balance. However, it should be noted that the SDLT rules can be very complex and are dependent on the specific circumstances surrounding the transfer.
Where land or property is transferred from a partnership to a ‘connected’ company, the transfer may be charged to SDLT under special partnership rules which could mean that a reduced, or potentiality ‘nil’ SDLT liability arises. Under the ‘partnership rules’ SDLT is assessed on a proportion of the market value of the property transferred, irrespective of what, if any, consideration is actually paid for it. The chargeable proportion of the asset’s market value is determined by assessing the proportion of the asset that was not previously owned by the recipient and their ‘corresponding partners’, as determined by the income profit sharing ratios.
Given the complexity of the SDLT partnerships rules, including specific and general anti-avoidance provisions which can result in a retrospective charge, it’s recommended to seek advice before any transfer of land or property takes place.
Capital Gains Tax
The sale or transfer of property from one entity to another is a chargeable disposal for Capital Gains Tax (CGT) purposes, and there’s no exemption for connected entities. In fact, the sale of an asset to a connected party (which includes a company under common control) is deemed to take place at market value, rather than the consideration paid, when working out the chargeable gain.
In England and Wales, a partnership is not a legal entity distinct from the partners and cannot therefore own property in its own right. The partners of a partnership are separately taxed on their individual share of any gain arising on the disposal of a partnership asset.
All individuals have an Annual Exempt Allowance (AEA) for CGT purposes. Any gains up to the AEA is free of CGT. In 2022-23, the AEA was £12,300 for individuals and from 2023-24, the amount reduced to £6,000.
The rate of CGT payable by each partner on their share of partnership gains, after deducting any available AEA, depends on their marginal rate of income tax. Basic rate taxpayers will pay CGT at 10% and higher rate taxpayers will pay CGT at 20%, on non-residential property (correspondingly, the rates are 18% and 28% for residential property).
Costs of buying, improving, and selling the asset can be deducted from the proceeds received when calculating the chargeable gain.
There are CGT relief schemes available, such as Rollover Relief, which defers the gain by reinvesting the sales proceeds in the purchase of another business asset.
Assuming that the business is VAT registered, a sale of property will either be exempt from VAT or, if a non-residential property has been ‘opted to tax’, subject to VAT at the standard rate.
However, if certain conditions are met, the sale could be treated as a Transfer of Going Concern (TOGC), meaning that the sale is treated as outside the scope of VAT, and VAT is not chargeable.
One of the conditions is that the assets being sold are done so along with a business, or part of a business, as a going concern and capable of trading as a separate operation.
An example of this may be a packhouse and cold store, which is owned by a farming partnership but rented by a limited company. If the farming partnership sold the assets to a different limited company, who continued renting it out to the current tenant, the sale of the asset to the company could potentially qualify as a TOGC. In effect, a property rental business has been transferred.
TOGC treatment is mandatory if the relevant conditions are met. VAT incorrectly charged on a sale of property, where TOGC treatment applies, is not recoverable for the purchaser.
It’s very important to get the terms of the sale and purchase contract right to ensure that the correct VAT treatment is applied, and where applicable, allowing the seller to charge VAT on top of the agreed purchase price.
If VAT is chargeable, and assuming the purchaser is VAT registered and able to fully reclaim VAT it incurs on its costs, the VAT will wash through as it will be collected and remitted by the seller and reclaimed by the purchaser. However, there will be VAT cashflow to manage, particularly for the purchaser as they’ll pay VAT to the seller on completion, but may have to wait several months before reclaiming the input tax through a VAT return.
There are further VAT considerations that the seller (the partnership in our example) would need to understand before transferring an asset into a limited company, and all the specific circumstances would need to be taken into account as early in the process as possible.
Finally, it should also be noted that if VAT is charged on the sale, the SDLT payable will be on the VAT inclusive amount, increasing the amount of SDLT due.
Capital allowances are a tax relief that a business can claim on the value of qualifying capital expenditure, against taxable profits. Expenditure that is eligible for capital allowances is that on qualifying plant and machinery (including equipment, machinery, and business vehicles).
Depending on the asset being sold by the partnership to the company, there may be items of plant and machinery being sold as part of the wider asset. For example, a chicken shed will incorporate plant and machinery which will be transferred as part of the sale of the building.
When an asset is sold on which capital allowances have been previously claimed, the selling entity generally makes an adjustment in its tax computation, which leads to either a balancing allowance or balancing charge. The acquiring entity then uses the purchase price as the basis for its capital allowances claims.
It is, however, possible for a joint election to be made where there’s a succession of trade from one entity to the other. Where the joint election is made, the asset can be transferred at its tax written down value instead of market value. This would mean that the transfer can take place without giving rise to balancing allowances or charges.
The transfer of assets from a partnership to a related company can be advantageous, but must be weighed up with the various tax costs to ensure the viability of the transaction.
This is a complex area – we recommend seeking professional advice before undertaking a transaction involving land or property.