In most cases the successor will need to avail of Agricultural Relief in order to avoid a gift tax liability and this will require him/her to either farm the holding themselves or lease it to a qualified or full-time farmer.
This means that simply going through the motions of effecting a transfer and the transferor continuing to farm as if nothing had changed is no longer possible. The most commonly used options for securing an income post transfer are;
A partnership between the transferor and transferee
The transferor receives a wage
A right of maintenance
Since the tightening of the Agricultural Relief rules this has become one of the most popular arrangements which assures an income for the transferor while also providing him/her with a continuing active involvement in the farm business.
While the transferee will typically have a 50pc or greater interest in the partnership, the transferor can be remunerated primarily by way of a partner's salary which can reflect his management and labour contribution while also availing of the most efficient income tax treatment.
If there is no immediate rush to execute the farm transfer the Successor Farm Partnership Scheme is a worthwhile option as it grants the parties a total of up to €25,000 in tax credits between them for the first five years of the partnership.
An important condition of the scheme is that the transfer can only happen after the partnership has been in existence for at least three years but must happen before year ten.
It is important to note that a partnership provides no legal guarantee that the structure will survive for as long as the partners may wish it to survive in which case the income may cease to be.
Generally, such arrangements require an act of faith on the part of the transferor to be assured of an income post transfer.
A further and possibly simpler option is for the transferor to be paid a PAYE wage in return for their labour and management input. The wage will be tax allowable for the transferee and taxable for the transferor.
However, married couples where one or both spouses are over 65 may earn up to €36,000 tax free which may mean that where both are receiving the State pension, a farm wage of up to €10,696 will be free of tax.
Again, the difficulty with such an arrangement is that there is no legal surety that the payment won't cease so again the transferor is reliant on making an act of faith in his successor.
A further point worthy of note is that farmers who were participants in the Early Retirement Scheme cannot be seen to be involved in any form of commercial farming activity and as such cannot be paid a wage.
RIGHT OF MAINTENANCE
Where the transferor is worried about the future security of the farm in terms of debt or matrimonial issues that could arise for the successor, they may not be prepared to rely on the aforementioned act of faith.
In this case they may require that a right of support and maintenance be included as a first legal charge in the Deed of Transfer.
While they do not have to exercise these rights, they are available should they be required. The Deed of Transfer can be specific and can include the provision of such things as food, clothing, heating and electricity.
It can also include that nursing home expenses shall be paid for should the need arise.
While a charge of this nature will be taken into account in assessing one's worth in a family law context as it does represent a current or future potential liability, it may render the deeds less attractive to a bank from a security perspective.
Persons who might otherwise have been entitled to free nursing home care may end up paying for it. Taking all aspects into consideration, a secured right of maintenance could prove an unbearable burden on your successor.
Another possible means to enable a successor provide financial support to the transferor in a tax efficient manner is to covenant money.
Due to restrictions on the amount that one can covenant this option will be of limited benefit in most situations except where either parent is permanently incapicated. Where the recipient is 65 or over the successor can claim tax relief on an amount up to 5pc of his/her taxable income.
There is no limit on the amount that can be covenanted where the recipient is permanently incapacitated.
It is important to note that money covenanted to people receiving a means-tested allowance such as a Qualified Adult Allowance or a Carer's Allowance may affect their entitlement to the allowance in question.
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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