Income Tax Planning

Although we are now approaching the end of the Basic Payment Scheme/Delinked Payments, the last few years have been relatively profitable for some farms.

Sheep, and especially cattle, prices increased for a few years up to 2025, and the milk price bounced back in 2024/25 (although global supply pressures have made a large dent since).

Some farmers have successfully replaced BPS funding with SFI income grants and secured capital grants for fencing and other improvements, and planned application windows in June (to be targeted towards smaller farms) and September 2026 will provide further opportunities to join SFI. However, there remains a question mark over the likely longevity of these schemes.

The arable sector has been more difficult, with crop prices depressed since a temporary bounce around the start of the Ukraine war.

In tandem with the long term trend for surviving farms to expand, is profit volatility. Except for a fortunate few, borrowing is nearly always essential for growth but, where possible, it should be focused on assets that will increase farm output (e.g. land purchases) and care is needed not to overstretch.

If you still have a bank manager, please consider any reservations they express about affordability – they really do want profitable businesses.

Partnership structure

As your accountants, part of our job is to ensure that your business structure is tax-efficient. For most family farms, partnership continues to be the most suitable structure. With current tax and NIC rates and allowances, a four partner farm sharing profits equally will typically pay 0% tax on the first £25,000 of tax adjusted profit, 23% on the next £150,000 and 41% on the following tranche.

This assumes that the four partners comprise one couple in receipt of state pension and one younger couple, with no other income.

Partnership structure allows 2 or 5 year farmer averaging to be claimed, helping us to ensure that personal allowances and basic rate income tax bands are used efficiently. Partners in highly profitable farms can make pension contributions to reduce exposure to higher rates of income tax.

Company structure

Where profits are consistently high and family drawings are modest, there may be an ongoing tax saving in switching to a company structure. A company pays 19% corporation tax on the first £50,000 of profit, 26½% on the next £200,000 and 25% thereafter. Thus, company structure can save substantial tax where profits are regularly high, drawings are low and/or there are only one or two individuals among whom profits could be shared in a partnership.

Company structure also offers the protection of limited liability.

However, there can be extra costs and disadvantages, including:

• Costs of creating the new structure, including Stamp Duty Land Tax on any property transferred to the company. In practice, existing land would usually be kept outside the company, unless the level of borrowings dictates otherwise.

• In addition to corporation tax payable on the company’s profit, there may be ongoing income tax charges on family drawings and on private usages of company owned assets. In practice, assets such as motor cars would usually be kept outside the company (in which case their running costs are not company expenses).

• The tax-efficiency of a company often relies on keeping down drawings, and reinvesting the company’s profits in new company assets (eg additional stock). This means that future land purchases are likely to be in the company’s name, which will result in extra tax charges in the event of later private use (e.g. a house taken into family use, or land taken to build a family house). Those extra tax charges can be substantial.

• Any losses can be offset only against company profits

• Extra administration, including the preparation of statutory accounts and other documents for filing at Companies House, PAYE compliance for directors, and other requirements for formal paperwork (eg dividend minutes).

• Agricultural property relief (APR) on company shares is only available to controlling shareholders. Against that, it is easier and cheaper to make lifetime gifts of shares in a company, rather than interests in land.

• Cost of extracting funds if a major liability (e.g. inheritance tax) falls to be paid personally and the available resources are held in a company.

Conclusion

Despite the disadvantages, restructuring as a company can be the right solution in some situations where taxable profits are consistently very high. However, it is crucial to obtain individual, tailored advice before acting. We would be glad to discuss your circumstances.