Incorporation is the way to save on buying land
Published 22/02/2012 | 06:00
Farmland continues to buck the national trend in property, with values stabilising if not actually beginning to creep up on the back of stronger farm incomes.
The expansionary era heralded by the Food Harvest 2020 report has many farmers looking at expanding their farm enterprise by buying land. These fall into two categories: farmers with access to bank funding and those with cash reserves built up from trading or land sales during the good times.
In many cases, the purchase of land is not solely driven by its inherent profit potential. This is especially the case for farmers with cash reserves who view land as a store of value and a safe haven asset in times of economic turmoil.
For farmers who are borrowing, it's a completely different story. The average price paid for farmland in 2010 was about €9,000/ac. A farmer buying land should calculate the expected profit per acre, factor in the cost of servicing debt and tax liabilities, and weigh the potential profits against the prospects of repaying the debt drawdown to buy the land. All factors should be considered.
For example, will a bigger farm mean that profits on existing farmland increase?
Interest rates on debt are attractive after being cut to stimulate growth. This is unlikely to always be the case and projections should take into account the prospect of interest rates rising in the long-term.
The income tax cost of financing debt on land acquisitions is prohibitive. To repay €1m of capital will require around €2m of income before tax, assuming the farmer is paying a higher rate of income tax.