Running a farm in the most effective, most tax-efficient way
possible is no easy task. But it pays to think about how you should manage your farm from a tax and accounting perspective.
Managing your farm: sole trader, partnerships or limited company?
Running a farm in the most effective, most tax-efficient way possible is no easy task. Rules and regulations are always changing, and there’s invariably lots of complicated paperwork to fill in, or complex requirements to try and wrap your head around.
But it pays to think about how you should manage your farm
from a tax and accounting perspective.
Get it right, and you could reduce your tax liabilities, save more into your pension and plan for the future more effectively. Get it wrong, and you could be throwing money away.
The difference between a sole trader/partnership and a
The main difference between a sole trader/partnership
business, and a business that operates as a limited company is the position of
In a sole trader/partnership, you (and your partners) are
the owner, the manager and the business itself, all rolled into one. There’s no
separation in the eyes of the law (and HMRC) between you and your business.
In a limited company, the business is a separate legal
entity. You don’t “own” the business, you have shares in it and serve as a
Differences in the way a sole trader/partnership and a
limited company operate then stem from this legal definition of ownership.
In its simplified form:
As a sole trader/partner:
You’re individually responsible and can be sued
You’re self employed
You pay Class 2 & 4 National Insurance and Income Tax
You can access funds in your account whenever and however you want
You’re liable personally for business debts
You can have a personal pension only
You generally don’t have to submit accounts to HMRC or Companies House
As a limited company:
You generally cannot be sued or held personally
You’re a director, and can be an employee too
The company pays Corporation Tax. Shareholders
pay Dividend Tax. Employees pay National Insurance and Income Tax.
You cannot withdraw money when you want – it
must be taken as dividends or earnings and is taxed
Unless you’ve made personal guarantees, you
won’t be liable for debts
Pension plans are more generous and more tax
You must prepare and submit annual accounts.
Of course, there are various nuances and restrictions on the above, but this gives you a general overview of the differences between a limited company and a sole trader/partnership.
Why many farms operate as a limited company
Managing your farm as a limited company is more onerous in
terms of the paperwork that must be completed and the requirements that must be
But despite that, there are many benefits to operating in
Primarily, it’s often more tax efficient. Corporation Tax is
currently only 19%, which compares with the self-employed rates of 20%. 40% and
45% along with National Insurance at 2% and 9%. Managed correctly, a limited
company will generally pay less tax than a sole trader/partnership.
There’s also the limitation of liability too. Should
anything go wrong, you and your family are not personally responsible. However,
a word of warning: If you give personal guarantees on overdrafts or loans, this
liability is eroded.
Other benefits of operating as a limited company include
flexibility in asset separation, raising capital and bringing individuals into
As a limited company, you can:
Pledge company assets – including livestock – to
support borrowing and raise additional finance
Separate one farm from another, or segregate a
farming business from other assets – like a portfolio of investment properties
Create more beneficial pension schemes for
directors, including yourself. These are wholly deductible for Corporation Tax
Bring tenants, children or other employees into
the business, with shares, where a partnership would be impractical
When you incorporate from a sole trader/partnership, you can also have the new company pay market value for your herd. This then gives you a credit to your directors’ loan account, meaning you can withdraw profits without any tax implications.
The limitation of a limited company
Although there are a lot of benefits to managing your farm
as a limited company, there are drawbacks too. These fall into two categories –
loss of freedom and additional workload.
With a limited company, you have to submit your accounts to
HMRC and Companies House, so you lose privacy. You also can’t withdraw money
from your account any way you want. It’s more difficult to get loans and access
There’s more paperwork too – and associated legal and
accounting costs. Meetings must be recorded, regulations must be followed and
PAYE and P11D schemes must be administered correctly.
Of course, a good accountant will take care of all that for
Limited companies make tax relief and liability a little
more complicated too:
Fixed assets may be subject to double tax liability, for both the company and the shareholder if they’re disposed of
If a farmhouse is held in the company name, it won’t qualify for exemption from Capital Gains Tax
Inheritance tax relief is impacted if the land is owned by the company
Expenses, with regards to the farmhouse and cars, are difficult to get relief on due to the P11D regime.
The best of both worlds?
So which option should you choose, to manage your farm in
the most effective way possible?
Ideally, you want a limited company to make tax savings and
benefit from the tax-free uplift on your herd.
But you also want a sole trader/partnership to offer
flexibility on how you run vehicles and farmhouses, and to safeguard both
Agricultural Property Relief and Business Property Relief.
The solution for many farmers is to have both. To separate
your business into a limited company and a sole trader/partnership. With this
two-tiered approach, you run dairy/meat enterprises out of a limited company,
whilst anything to do with land cultivation continues to operate as a
traditional partnership or sole trader.
Of course, there’s lots to think about and lots of setting
up that’s needed to make this vision a reality – but it is absolutely feasible
to get the best of both worlds.
Remember there are all kinds of different tax implications
on expenses, on selling the business, on death and inheritance, so you need to
think all of these through. They can be complicated and there’s lots to
We can go through all the options with you. Speak to us
today, and we’ll help you make sure you’re managing your farm in the most
efficient and effective way possible.