How a company structure could help IHT planning

Moving from a sole trader or partnership status to trading as a company needs careful thought across a range of aspects.

A corporate structure means more regulatory and reporting requirements, some business and personal information being publicly available through Companies House and the absolute separation of personal and company funds.

Also, once a company is established, it can be very costly to unwind.

See also: How to plan pension funds as 40% inheritance tax hits

However, the October 2024 Budget reforms to agricultural property relief (APR) and business property relief (BPR) from inheritance tax (IHT) may lead to the formation of more farming companies.

Accountants have by no means seen a wave of conversions, but say the flexibility of being able to issue different classes of shares can help with succession and IHT planning.

“We use companies a lot,” says accountant Sam Kirkham, a partner in Albert Goodman’s farms and estates team.

“Where the business is profitable and not all the profit is needed for the family to live on, a company is a good way to fund investment.

“We have one farming business converting partly because of the IHT changes and several who were considering a corporate structure before the Budget, and are now accelerating their plans.

“It’s certainly not for everyone and depends on what the succession plan is, how much income is needed to be drawn out of the business and what the cost of transfer would be.”

All aspects of a company structure need to be considered, says Luke Cochrane, a director of accountant and tax adviser Land Family Business.

“There may be an income tax saving, and capital gains tax reliefs can be available on the way in – incorporation relief may be available for both trading and investment businesses in certain situations [this delays capital gains tax on property transferred into a company] but there are conditions.

“The limited liability aspect of a company structure can help businesses which involve the public, although personal guarantees may be required.”

IHT planning 

Incorporating businesses or transferring assets into existing companies can offer the ability to utilise £1m IHT-free allowances for each shareholder, thus spreading the IHT risk.

Shares in trading companies can qualify for BPR.

“This approach could potentially shield a greater portion of the estate from IHT, depending on individual circumstances,” says Sam.

Historically, partnerships had an advantage over companies in that partnerships could (and still can until April 2026) hold assets to secure 100% IHT relief, while under a company structure only 50% relief is available in many circumstances.

With relief limited at 100% up to £1m an individual and at 50% after that, companies will be at less of a disadvantage in this respect from April 2026.

A company can give control and flexibility – assets can be passed on in lifetime to reduce the exposure to IHT and a limited company can, if it suits, be run by people other than the company owners.

“For example, the next generation could own the shares while the directors [in farming terms the older or established generation] can be paid a salary to run the business,” says Sam.

Under IHT rules, when someone gifts property to the next generation, they must not retain any benefit from the gifted assets, for example by continuing to take an income from them, or occupying a property (unless a market rent is paid).

Often, where assets are transferred to a new company, the value of those assets can be held as a loan due to the existing owners.

This can be a tax-efficient way of the current generation extracting cash from the company, after the company has been passed to the younger generation to own and run, says Sam.

Corporation tax rates, at 25% for companies making more than £50,000 profit a year, are lower than the personal tax rate for many farmers and partners in farming businesses.

Companies with profits lower than £50,000 pay corporation tax at 19%.

Share valuations for IHT purposes are subject to discounts which are generally higher than those applied to jointly-owned property.

Luke gives the example of a 25% stake in a farming company being likely to receive a discount of 50%, bringing its value down to 12.5%.

Controlling shareholdings also receive a discount, but at a lower rate.

Different classes of shares can be issued with varying voting rights, and can help pass value down the generations.

For example, “freezer” shares can be held by the older generation to limit the growth in the value of an individual’s estate, while “growth” shares can be held by the next generation and can increase in value.

“This is particularly useful if the next generation is involved in the business, to incentivise them for their future input,” Sam says.