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Question: I’m in a farming partnership with my son, and we also operate through a limited company. We’re planning to buy a piece of land and we’re unsure who should take out the loan to finance the purchase.
Should it be in my name, my son’s name, the partnership’s name, or the limited company’s name? The way we’re structured seems to add a layer of complexity to lending. We have lots of options but what factors should we be considering when making this decision?
Answer: This is an interesting question as the decision can have significant implications for your farm’s finances, taxes, and succession plans.
Firstly, it’s crucial to understand how your business structure impacts your decision. Sole trader, limited company and partnership structures each have different implications when it comes to borrowing and asset ownership.
Your dual structure, encompassing both a partnership and limited company, adds complexity. You could take the loan out in either individual’s name, in joint names or in the limited company’s name. But which is best?
Here are some of the key considerations.
Registered owner of the land: The registered owner of the land should be the same entity that’s taking out the loan and paying for it.
Who is paying for the land? The entity generating the income or receiving the profits (ie partner) should ideally be the one taking out the loan.
Loan agreement name: The name on the loan agreement should match the entity borrowing the money. Mismatches can lead to possible legal and tax complications.
Tax implications: If the limited company buys the land, it can pay the loan after paying Corporation Tax (CT) at 12.5% versus up to 55% for an individual or in a partnership.
Remember, land is not like farm buildings or machinery where you can get a capital allowance for your expenditure against your taxes. The cost can’t be deducted from your taxable income.
Ownership and control: If the limited company owns the land, it is a company asset. If an individual owns the land, they have direct control over it.
Young farmer relief: Limited companies can’t claim young farmer stock relief, which could affect stamp duty.
Succession planning: Consider your long-term plans. The person set to inherit the company might not be the same person intended to inherit the land.
Flexibility for the business: Land can be licensed or leased to a limited company or partnership. The trading entity does not have to own the land to use it.
Life assurance costs: If borrowing through the limited company, you’ll need keyman cover. If borrowing in an individual’s name, the named borrower will need life cover. That cost can be age dependent, meaning it would be less expensive for your son.
Age of borrower and loan term: Land loans can typically be structured over a 20-year term, depending on the age of the borrower.
Older borrowers may face shorter loan terms or higher repayments, which could impact the feasibility of an individual loan.
Considering all of the above, there’s no one-size-fits-all answer to making your decision, but here’s some guidance:
1. Obtaining advice from your accountant and a legal professional is essential when farming through complex structures such as limited companies and partnerships. They can provide tailored advice based on your specific situation and long-term goals.
2. If you’re considering personal ownership for succession planning reasons, weigh this against the tax implications of extracting money from the company/ partnership to service a personal loan.
The key is to ensure alignment between who owns the land, who is paying for it and who is named on the loan agreement. This clarity will help you avoid legal and tax pitfalls down the road.
Noreen Lacey is head of banking with Ifac, which is the professional services firm for farming, food and agri businesses.
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