Estate planning refers to the tax efficient transfer of assets to the next generation, including both gifts and inheritances, he says. Gifts are a lifetime transfer, while inheritances are transfers upon death. The core elements around both gifts and inheritance are;
· Legal effectiveness
· Tax efficiency
He advises to look at the transfer from a practical point of view and then from a tax point of view. It may take some ‘tweeking’ from a tax point of view but don’t let tax efficiency drive the overall transfer, he says.
· Ensuring oneself is secure from an income point of view
· Is there an income tax effect from cessation?
· Successor - have they off farm income and will this affect his/her income tax liability? He says this is an area that most have not looked at and particularly if the successor has an off farm income, they could end up paying at the high rate of tax whereas the parents pay the low rate of tax.
Will v’s No Will
He says the succession Act covers two primary areas:
· Transfer via a Will – where it is transferred by Will. In this case there is control over the assets and where they fall. It can facilitate proper tax planning, he says.
· Where there is no Will – This is also referred to as Intestate Estate. In this case, the law lays out where the assets fall. While tax planning can take place, it is extremely complex, according to Declan.
Taking out the complexities
Farmers should consider maximise the reliefs, minimising the tax and minimise the cost to the farm, thus leaving the maximum amount of funds in the farm, protecting ones’ own security and looking after other family members.
In looking after other family members one example is a site, he says. For example, it is often said that the farm is left to a son or a daughter and then give a site to one of the siblings. A site from a parent to a child attracts no capital gains tax where a site from a sibling to another can attract Capital Gains Tax.
Capital Acquisition Tax (CAT) issues and planning
When looking at CAT issues, one must look at the following taxes:
· Gift and inheritance tax
· Capital gains tax
· Stamp Duty
· Income Tax
In looking at the taxes and the transfer who is liable to tax cost? Lifetime transfers which are regarded as a Succession, there are three taxes:
· Capital Acquisitions tax which is due by the transferee
· Capital Gains tax, which is due by the transferor
· Stamp Duty, due by the transferee
However, upon death, he says one needs to look at the difference and the fact that there is no Capital Gains Tax, no Stamp Duty tax and only Capital Acquisition tax, which is payable, if any, by the transferee. He says, if one looks at the rate of Capital Acquisition tax it is 33pc on the amount over the threshold. Thresholds are as follows:
· Class A – parent to child /Favourite Nephew - €320,000
· Class B – blood relative - €32,500
· Non-relative - €16,275
All gifts and inheritances are aggregated since December 5, 1991.
· There is an annual allowance of €3,000
· There are various reliefs’ available i.e. Agricultural Relief, Business Relief, Favourite Nephew/Niece reliefs.
· Everything since December 5, 1991 within the same class i.e. Parent to child etc. is aggregated.
He says one can give a conditional gift of cash to a transferee and have a condition that they invest in property and avail of Agricultural Relief. In addition, land leasing has become extremely popular, he says.
Capital Acquisition Tax Under
This tax there are two tests, the first test is the farmer test, which is 80pc of your assets on the date of acquisition must be agricultural property, he says. It now must also include the Active Farmer Test, he says. To be an active farmer you must have; An Agricultural qualification, or spend 50pc of your time farming, or lease to an Active Farmer, or lease to someone who is carrying out the business of solar panels, he says.
He says this option are for those who cannot obtain Agricultural relief. He says in order to get this the business of farming must be carried on. For a lifetime transfer, the business of farming must be carried on for five years and upon death must be carried on for another two years, he says. You must continue the business for 6 years and the main benefit of Agricultural relief and business relief is that the values of the assets are reduced by 90pc, according to Declan, adding the business must be transferred, not just the asset.
Capital Acquisition Tax - Favourite Nephew/Favourite Niece Relief
To avail of this, one can be treated the same as a son/daughter or a child. To avail of this, you must help in the business for at least five years prior to the transfer, for at least fifteen hours per week.
The benefit of this is you are treated the same as a son/daughter and are entitled to the class A threshold, he says. You are only entitled to Class A threshold on business assets, i.e. Land, machinery, stock, buildings etc. You are not entitled to it on cash assets, according to Declan.
Capital Acquisition Tax
This is the tax for the person receiving the property, he says. It is currently 33pc and the amount one can get tax free is €320,000. His main advice in this area would be to try and get the reliefs, reliefs will reduce the tax to the minimum and then consider planning around same. Planning can include;
· If you still have a liability, why not take out an insurance policy
· Beware of the free use of land over the years
· Beware of free use of money or loans
· Ensure all planning points are brought into play
· When you consider the success tax credit of €5,000
Capital Gains Tax
Even though the asset is transferring one is making a disposal of an asset, in a lot of cases no money is transferring, one is liable to Capital Gains Tax, according to Declan. This is a tax on the uplift in value of the assets.
However, various reliefs exist and with proper use of these reliefs, no liability can arise, he says. There are two types of reliefs; within the family and outside the family, he says.
Stamp Duty for Young Trained Farmer(s) is zero provided certain conditions are met, he says.
· Stamp Duty for a Blood Relative is at 1pc
· Stamp Duty for leases are at 1pc
· Stamp Duty on share is 1pc
There is also a new consolidation relief for a limited number of years whereby if you sell land and buy land near you, you can avail of the relief, according to Declan.
Finance Act/Budget 2018
Finance Act/Budget 2018 extended the finance relief to Young Trained Farmers for three years for 2019, 2020 and 2021, he says. However, the consanquanuity relief for Blood Relative ends in 2020. The problem with the new Stamp Duty relief is as follows;
· It is from a start-up situation
· There must be a business plan
· The business plan must be as wide as possible and include future transfers
· If one does not get the Young Trained Farmer on a second transfer, one will be liable to Stamp Duty on it. There are a lot of clarifications required on this stamp duty and at the time of writing a lot of considerations are being questioned and answers are awaited.
Most importantly with Stamp duty;
· There is a limit of €70,000 that interacts with the Succession credit and Young Trained Farmers Stock relief
· It could inhibit the purchase of land by a Young Trained Farmer where he has already got stamp duty relief.