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Saturday 3 December 2016

Advice: How farmers can make capital gains tax savings from Budget 2017

Martin O'Sullivan

Published 03/11/2016 | 15:00

The rate of capital gains tax was reduced in the recent budget
The rate of capital gains tax was reduced in the recent budget

Budget 2017 reduced the rate of capital gains tax (CGT) to 10pc on disposal of assets under the Entrepreneur Relief scheme.

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The relief, which was originally introduced in 2013, was designed to promote entrepreneurship and has been substantially simplified.

It now offers business asset owners the opportunity of disposing of those assets at a 10pc rate of tax on any gains made subject to certain limits and conditions.

The relief is available to individual owners, including farmers, of a trade or business (firms or sole traders) in respect of the disposal of all or a part of that trade or business which they have owned for at least three years.

A capital gains tax rate of 10pc will apply to the net chargeable gains arising on disposals of assets comprising the whole or part of a trade or business, subject to a lifetime limit of €1m on such gains.

While the relief extends to shareholdings in unquoted companies, such as farming companies, it will not be available to the actual company in respect of business asset disposals by such entities.

The effect of the relief is to reduce the rate of tax on a disposal of chargeable business assets from the standard rate of 33pc to 10pc for qualifying gains of up to €1m in a vendor's lifetime. Thus, the maximum value of the relief is €230,000.

Qualifying conditions

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The qualifying conditions are:

* The disposal must relate to a "qualifying business", which will include the vast majority of active farmers, whether trading as sole traders or firms. l The disposal must comprise "chargeable business assets", which includes agricultural land which was used for the purpose of the business. He/she must have beneficially owned the chargeable business assets for a continuous period of three out of the five years before the date of disposal. This applies to both sole traders and sellers of shares they hold in their firm.

* A disposal involving ordinary shares in a firm will only qualify if the individual disposing holds 5pc or more of the ordinary share capital in the firm, and is or has been a director or employee of the firm who spent 50pc or more of his/her working time in the service of that firm for a continuous period of three out of five years immediately before the disposal of the shares.

Entrepreneur vs Retirement Relief

Both reliefs can apply to the same transaction providing the conditions for the reliefs are met. Retirement Relief is available once the assets have been owned and farmed for 10 years prior to the date of sale or prior to first letting, and the sale proceeds are less than €750,000.

Providing the individual is over 55 years and under 66 years, he/she may dispose of part or all of his/her assets free of capital gains tax. Where the person disposing is over 66, the limit is reduced to €500,000.

Where disposal proceeds exceed €750,000 (or €500,000) there is marginal relief, based on the excess being subject to 50pc tax. This applies up to the point whereby taxing the actual gain at 33pc becomes more beneficial. The important point to note in respect of Retirement Relief is that tax is calculated on the gross sale proceeds and not on the gain.

It is important to note that in the absence of Entrepreneur Relief a subsequent disposal may result in a clawback of relief gained as the €750,000/ €500,000 is a lifetime limit and all disposals are aggregated.

How relief can pay dividends

The following case studies best illustrate how Entrepreneur Relief can augment Retirement Relief in certain circumstances.

Case Study (1)

Joe Farmer is 60 years of age, disposes of land for €1.2m and satisfies all of the conditions of both Entrepreneur Relief and Retirement Relief. Assuming a base cost of €400,000, which includes allowable deductions and his personal exemption, we will look at Joe's CGT liability under the following headings:

1. Normal CGT treatment with no relief

In the absence of any relief the taxable gain is €800,000 giving rise to a liability at 33pc of €264,000.

2. Claiming Retirement Relief

Assuming Joe is over 55 and under 66 he may claim retirement relief on €750,000 of the gross proceeds and marginal relief on the remainder. This will give rise to a liability of €225,000, so he saves € 39,000 by claiming Retirement Relief.

3. Claiming Entrepreneur Relief

As Joe's gain is less than €1m his liability works out at 10pc of €800,000, i.e. €80,000.

Conclusion

As the tax due under Entrepreneur Relief is less than Retirement Relief, there is no Retirement Relief and the lower CGT liability is due. The total value of Entrepreneur Relief in this case is a saving of €184,000.

Case Study (2)

Peter Farmer is 70 years of age and disposes of land for €530,000 and satisfies all of the conditions of both Entrepreneur Relief and Retirement Relief. Assuming a base cost of €200,000 which includes allowable deductions and his personal exemption, we will look at Peter's CGT liability under the following headings:

1. Normal CGT treatment with no relief

In the absence of any relief the taxable gain is €330,000 giving rise to a liability at 33pc of €108,900.

2. Claiming Retirement Relief

Peter may claim Retirement Relief exemption on €500,000 with the balance of €30,000 being subject to 50pc tax, so his liability is €15,000.

3. Claiming Entrepreneur Relief

Peter's taxable gain is €330,000, so his liability works out at 10pc, i.e. €33,000.

Conclusion

As Retirement Relief is more beneficial yielding a saving of €93,900 compared to Entrepreneur Relief yielding a saving of €75,900, Peter will opt for Entrepreneur Relief.

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