With an increasingly divergent tax system and far more information now being made available publicly, how best to structure your business interests can become a complex decision. At the heart of this will be not only the need to operate tax efficiently, but also in a manner that fits with how comfortable you feel operating as a company.

Differing tax rates

Let’s first look at the changing tax landscape and the current tax rates:

Where an individual has non-dividend income in excess of the basic rate band they will pay tax at 40% and where their income exceeds &150,000 they will pay tax at 45%. This is a striking contrast to the rate at which companies pay tax, which for the 2016-17 tax year is 20% and will decrease further to 19% with effect from April 2017.

It is these diverging rates that are making taxpayers, where they currently operate as an unincorporated business, consider the transition to operating as a company.

However, the government introduced new rules for the taxation of dividend income, effective from 6 April 2016, whereby the first &5,000 of dividend income received will be covered by a dividend allowance. This allowance will reduce to &2,000 from 6 April 2018. Above &5,000 per tax year, dividend income will be taxed depending on the taxpayer’s marginal tax rate.

Dividend income that falls within the personal allowance does not count towards the dividend allowance, which means that it is possible to receive &16,000 of dividend income tax free (2016-17 rates) if you had no other income. However, the increase in dividend income tax rates reduces the attractiveness of withdrawing dividend income from a company. Scrutiny of the figures is needed to establish the most beneficial position and those with a high proportion of dividend income will be most affected by these increased rates.

Incorporating a property portfolio

Where a property business is operated as an unincorporated business, all rental profits are taxed at the taxpayer’s marginal rate of tax (20%, 40% or 45%). A company, on the other hand, pays tax at 20% (currently), decreasing further in April 2017.

A consideration for many landlords is the incorporation of their property portfolio in order to access the lower corporate tax rates.

Incorporation relief allows the assets of an unincorporated business to transfer to a new company without generating a capital gains tax charge. It is a requirement that all assets (except cash) are transferred to the new company and that there is a business that is being transferred.

Without incorporation relief, a capital gains tax charge will arise on the market value of the properties at the date of the transfer of assets to the new company, less acquisition costs. In a recent tax case (Elizabeth Moyne Ramsay v HM Revenue & Customs) the courts allowed the taxpayer’s claim for incorporation relief on the transfer of her property letting business to a company; this was on the basis that she was carrying on a business for the purposes of incorporation relief.

This is an important case and demonstrates what needs to be in place for a letting business to be considered a business (and incorporation relief available), as opposed to there being a passive activity where incorporation relief would not be available.

It is important to be mindful that there can be Stamp Duty Land Tax charges when transferring property between connected parties, such as to a company owner by the transferor.

Privacy issues

Whilst the corporate regime provides lower tax rates, one of the disadvantages is that it is difficult to provide privacy for family members who are involved in the company.

We have seen media coverage ‘naming and shaming’ wealthy landowners in receipt of the Common Agricultural Policy (CAP) single farm payment. This information was obtained from careful scrutiny of publicly available information and though there was nothing to suggest that the recipient of the CAP payments had done anything wrong, it did nevertheless provide unwelcome attention for those individuals named. 

A small limited company (one with a turnover of less than &6.5 million and less than 51 employees, even if the balance sheet exceeds &3.26 million) only needs to file abbreviated accounts. For some businesses, the fact that they have to publish their annual financial accounts (even if abbreviated) may not matter; however, in a competitive supply chain, the availability of these accounts can be unhelpful.

Sally Appleton, Partner, Saffery Champness LLP

Sally acts for a number of landed estates, advising owners of rural businesses on strategic matters and tax planning involving all financial and business aspects. She has a thorough technical knowledge together with an understanding of the commercial issues and challenges that the modern estate can face. 

Tel 01423 724572

Email sally.appleton@saffery.com

Fisher German will soon be launching our new rural intelligence app, a project which we have been working on over the last year. The app  brings together useful information and tools into one location to provide assistance and efficiency  of a rural nature all under one app.

David Merton, Head of the Rural Sector, said “The Fisher German Rural sector is extremely excited about the release of its new app which has been produced in partnership with Cuttlefish, a web and app designer based at Loughborough. Cuttlefish have a great deal of experience in the building of apps of varying descriptions and are local to the Ashby office who have led the development; they were an excellent fit as our partner in this new and exciting venture.”

The app itself features news feeds from Fisher German, the BBC and Farmers Weekly, alongside an events calendar reporting significant rural dates and events as well as weather reports based on your current location.

The app will also feature practical agricultural commodity data and have functional converters for currency, weights and measures, together with useful information regarding Fisher German including office locations, a staff directory and rural publications such as the Fisher German magazine, Agri-View and Agri-Facts.

Finally, there is an interactive map with a hybrid function showing both the road network and a satellite view of the terrain which also has the locations of Fisher Germans offices marked on. It is possible to use this feature to ascertain local authority and location data for the users current location.  There is a subscribe function which can be used to subscribe to  email updates and push notifications on up and coming events  and important dates.

Mike Reynolds, based in the  the Ashby de la Zouch office, who has led the development of the app reports  “the idea of an app was borne from the firms’ Rural away day during which a “Dragons Den” style challenge was set to members of the Rural sector in groups. The Rural app was the result of a collaboration of one particular group of which I  was a member, the idea was held by the rural board to be of value and I was asked to take the project forward  turning the concept into a reality.

I am excited to have worked on a project totally outside of the norm for a Rural Chartered Surveyor and am tremendously pleased with the result which brings together information useful to members of the rural community and related services, into one place for ease of use.”

For further information contact Mike Reynolds on 01530 410886 or email mike.reynolds@fishergerman.co.uk