Farming finance: Saving a fortune in the farm succession stakes

If nephews/nieces are going to inherit, there are ways to avoid being hit with big tax bills

'Prospective successors should be made aware that they are likely to inherit'

Martin O'Sullivan

Our practice recently ran a succession planning initiative, identifying cases where no obvious successor was emerging, and I was surprised at the number of farms owned by unmarried men or women, or widows or widowers with no children.

This prompted me to dig a bit deeper and look at the taxation consequences for the probable successors, who in the main were likely to be either nieces or nephews. In many cases these nieces or nephews had not been made aware that they were likely to inherit.

My findings revealed that unless the successor qualified for Favourite Nephew or Niece Relief, Capital Acquisitions Tax would be an issue in all cases where the holding was worth more than €325,000 - which applied to every case I looked at.

The magnitude of the liability depended on whether the successor would qualify for Agricultural Relief or Business Relief (a 90pc reduction if farm asset taxable value), which ranged from the manageable to the utterly unmanageable.

In essence, at current tax rates and thresholds Favourite Nephew or Niece Relief can effect a saving in tax of up €91,575, while Agricultural/Business Relief can save approximately 30pc of the value of the assets being inherited.

The clear message our investigations yielded was that prospective successors should be made aware that they are likely to inherit, as this may give them the opportunity to plan ahead and avoid a serious exposure to tax.

Agricultural Relief, Business Relief and Favourite Nephew or Niece Relief can in many cases be secured if the intended successor has been made aware that the farm has been willed to them.

Here, I deal with the requirements for satisfying the conditions for Favourite Nephew or Niece Relief.

The relief

The relief applies where the nephew or niece (who is a child of the disponer's brother or sister, or is a child of the civil partner of the disponer's brother or sister), has worked substantially on a full-time basis on the farm for five years prior to the ending of the disponer's beneficial interest in the business.

It is important to note that the relief applies to gifts or inheritances of business assets only such as farmland, farm buildings, livestock and machinery but does not apply to a farm dwelling or cash, shares or non-farm property.

Furthermore, nephews or nieces who have cared for an uncle or aunt for a five-year period or more but who do not fulfil the substantial full-time working in the business requirement are not eligible.

The qualifying nephew or niece is entitled to a tax-free threshold of €310,000, which is the same tax-free threshold that a son or daughter would be entitled to, known as the Group A threshold.

This compares with a threshold of €32,500 available to non-qualifying nieces or nephews, which is known as the Group B threshold.

Conditions

To qualify for the relief the nephew or niece must have worked substantially on a full-time basis for a period of five years prior to the gift or inheritance in carrying on, or assisting in carrying on, the farming enterprise of the disponer.

Revenue define 'substantially on a full-time basis' as to mean;

(i) working/assisting for at least 15 hours per week on the farm where the farm is run exclusively by the disponer and/or his spouse or civil partner, or

(ii) working/assisting for more than 24 hours per week where there is employed labour on the farm.

Where a nephew or niece has been made aware that they are going to inherit, such knowledge may give them the interest and incentive to work or assist on the farm for the required number of hours.

Life interest

It is not uncommon for a spouse (whom I'll call spouse A) to provide for the other spouse (spouse B) by way of a life interest in the farm, and thereafter when both spouses are dead it would go to a nephew or niece.

Assuming spouse A dies, the niece or nephew will not actually inherit the farm until spouse B dies, and in such a situation the favourite nephew/niece relief could still apply provided the niece or nephew had satisfied the requirements as set out above for five years or more prior to the death of spouse A.

Shares in a private farming company (not PLC or Co-op shares) may qualify for this relief also. The company must be a private trading company in which the person giving the gift is a director, and controls the company.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie