Many farm businesses operate a mixed corporate structure. One option is for the farm partnership to have a limited company partner. Often the limited company is owned by the same people as the partnership.
The reason for doing this is to use the lower tax rates available to limited companies. Companies pay corporation tax at 20% while individual tax payers would pay income tax at 40% on taxable income over £32,000.
However, HM Revenue & Customs have introduced new anti-avoidance tax rules which come into force in April 2014. Limited Companies have always had to pay a charge – called the S455 charge – on loans to participators, i.e. owners of the company. This rule will now be extended to include company loans to partnerships. So where partners draw more from the partnership than their actual profit share, and run up overdrawn capital accounts at the expense of the limited partner, this would be classed as a loan from the limited company. This rule will only apply to loans taken out from 19th March 2013. Anything that has gone before will be excluded. However, care will need to be taken regarding new transactions.
If you have any queries regarding business structures and corporate partners within your partnership, please contact Green and Co who have extensive experience of dealing with farm businesses.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.