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Saturday 10 December 2016

Succession planning can be a relief to next generation

Seek professional advice before retiring to ensure a smooth transition with maximum benefits

Mark Doyle

Published 15/03/2011 | 05:00

Agricultural property is defined as meaning farmland, pasture and woodland in Ireland and the EU and crops and timber grown thereon, together with houses and other buildings appropriate to the property. It also includes livestock and machinery
Agricultural property is defined as meaning farmland, pasture and woodland in Ireland and the EU and crops and timber grown thereon, together with houses and other buildings appropriate to the property. It also includes livestock and machinery

Managing a family farm is not all about the actual daily running of the farm but also about ensuring that the farm stays as a thriving business entity and is successfully passed onto the next generation.

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If you are considering retiring from the farming business, it is important that professional advice is obtained long before you retire to ensure a smooth transition.

There are a number of tax reliefs available to the retiring farmer who is considering passing on their interest in the farm to their children or other interested third parties. These tax reliefs are retirement relief for capital gains tax (CGT); agricultural relief and business relief for capital acquisitions tax (CAT) or gift and inheritance tax as it's often referred to; and young trained farmer relief and close relative relief for stamp duty.

The spectre of an upcoming Budget with significant input by the Labour Party should provide added motivation for any farmer considering succession planning. Speculation is that current generous tax reliefs that allow for a tax efficient transfer of a family farm will be curtailed or removed completely.

Retirement Relief

Where farm assets are passed on under a will there is no CGT charge. However, where farm assets pass on during the life-time of the farmer there will be a charge to tax. Although the farm may be transferred by way of a gift and the donor may receive no consideration for the transfer, a CGT charge may still arise as the donor will be deemed to receive proceeds equal to the market value of the farm. The current rate of CGT is 25pc.

Retirement relief is available to reduce any gains on the disposal of a farm where an individual is over the age of 55. Where the disposal is to a farmer's child, there is no limit on the value of the disposal. However, the child in question must retain the asset for a period of six years to avoid a clawback of the relief. Where it is to a third party, there is a limit of €750,000 on the value transferred for the purposes of the relief. Where the amount is more than this, a reduced rate of relief applies.

To qualify for the relief, the farmer must have owned the land for a minimum period of 10 years before the disposal. The land must also have been farmed throughout this 10-year period. Where the land has been let prior to the transfer, relief may still be available as the conditions are relaxed in certain circumstances. Relief can be lost where the land is held by a husband and wife, only one of whom farms the land.

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It is worth noting that the single farm payment will qualify as an asset for the purposes of the relief for disposals made on or after January 1 2005 provided the farmer fulfils the 10-year rule.

Capital Acquisitions Tax

Whether the farm is received under a will or as a gift, CAT may be due from the farmer's children or other beneficiaries on the receipt of a gift or inheritance. The tax is charged on the value of the gift or inheritance that exceeds the relevant tax-free threshold which depends on the relationship between the donor and the beneficiary. The current threshold from parent to child is €332,084.

There are a number of reliefs/exemptions from CAT. The principal reliefs for the purposes of this article are agricultural relief and business relief.

Agricultural Relief

This is a relief from CAT at a flat rate of a 90pc reduction in the market value of all agricultural property gifted or inherited. There is one major proviso, however. It is that the donee meets the "farmer test" which states that 80pc of the donee's assets consist -- after taking the relevant gift or inheritance -- of agricultural property.

For the purposes of the farmer test, no reduction is made from the market value of the property for any debts or encumbrances. The only exception to this is the mortgage on the farmer's main residence, which can be deducted provided that the residence is not agricultural property.

Agricultural relief shall cease to be applicable in relation to a gift or inheritance if the donee is not resident in Ireland for any of the three years after the relief is claimed.

Agricultural property is defined as meaning farmland, pasture and woodland in Ireland and the EU and crops and timber grown thereon, together with houses and other buildings appropriate to the property. It also includes livestock, bloodstock and farm machinery, and the single farm payment is considered agricultural property when passing with agricultural land.

Business Relief

Where agricultural relief does not apply, for example, if the beneficiary does not satisfy the farmer test, business relief may apply. Business relief reduces the value of "relevant business property" received by a person as a gift or inheritance by 90pc for the purposes of calculating the donee's CAT liability. For the relief to be available, the farmland and buildings must have been owned by the farmer for at least five years in the case of a gift and two years in the case of an inheritance.

Stamp duty on land

Stamp duty does not arise where a farm is passed on under a will. Where a farm is passed by way of a gift, stamp duty may arise depending on the nature and value of the assets.

A farm will be classified as commercial property so any transfer could incur stamp duty at an upper rate of 6pc on the market value of the farm. There is a relief for transfers between blood relatives which can result in a 50pc reduction in the rate of stamp duty payable.

It may be possible to further mitigate the charge to farmers' children if they qualify as a young trained farmer and satisfy the conditions for the relief.

Mark Doyle is a tax director at Grant Thornton

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