Share this content

Taxed twice? Incorporation

Taxed twice? Incorporation

Hi - farming partnership considering incorporating fully or maybe just putting in the plant & machinery to form a company that would do the 'farm work'.

The sale of the plant & machinery would crystallise a gain for CGT albeit at 10% re entrepreneur's relief and as is usually the case the 'purchase' price would become a directors loan in the company.

Am I right in thinking that if any of the directors then dies fairly soon into the formation of the company then IHT becomes due on the 'directors loan'? - Effectively surely the same money being taxed twice?

Suppose you would cover this potential libility off by buying some term / reducing term assurance on each of the director's lives (altho age / health of 1 of the directors could make cost of policy prohibitive.

Also - if the land is held outside the company presume that a formal tenancy req'd to maintain APR relief.

But again looking at IHT if one of the directors were to die within the 7 years that the company should have 'ownership' of the land & or the 2 years 'occupation' of the land then would there be implications for APR - suppose I am asking here the wisdom in doing anything which may involve IHT ivo the health of 1 of 'them' not being particularly robust.

Many thanks in advance for comments!


Please login or register to join the discussion.

24th Apr 2012 11:30

IHT etc

The sale of plant and machinery will not trigger a capital gain uness sold at a price greater than original cost. If sold for less than original cost, the proceeds go into the pool and possibly create a balancing charge. If the whole business (not just the machinery) is being transferred, the business of the partnership ceases and there could be a balancing allowance depending on the price.

You are correct that if a director's loan is created on incorporation, an asset is created which is not eligible for BPR. One solution is to issue redeemable preference shares, i.e. shares that can be converted back to cash when a withdrawal is desired. Depending on how this is done the shares should qualify for immediate BPR or BPR after 2 years. The former may create CGT issues so needs to be looked at carefully.

I do not see that a formal tenancy is required to maintain APR. S116(2)(a) gives 100% relief if the owner can obtain vacant possession within 12 months.

If the land has already been owned for 7 years prior to incorporation then the s117 requirement has already been satisfied and there is no need for the owner to control the company to get within the 2 year period.

I assume the land has no hope value? APR will only apply to agricultural value. Otherwise you will need BPR. Here the rules are more restrictive if land is held outisde the company. The owner must control the company to get 50% relief otherwise nothing. If the partners are husband and wife they will control the company. If they are not spouses and own 50% each neither will control the company and so BPR will not be available..

Thanks (1)
Share this content