Get to grips with the big bogeyman of farm succession
Tax issues are often the main stumbling block to the smooth transfer of land, writes our expert
Farm succession queries have become a weekly if not daily occurrence in my office.
I have written many times in the past on this issue but the queries keep coming so it's clearly something that's always topical.
My experience is that it is not the act of actually parting with ownership that is the problem but rather what I describe as the farm succession equivalent of 'Four Horsemen of the Apocalypse' that can be a major source of concern to an intending transferor. These are:
- Death or divorce of the transferee,
- Nursing home care
- Insufficient income post transfer.
Any or all of the above issues could have drastic consequences for a family farm if they came to pass so it is easy to see how farmers would have concerns and how the transfer process may be agonising for some.
Good legal and taxation advice are absolutely imperative.
Just because your family accountant and solicitor are the current incumbents does not mean that they are expert in this area.
You should seek out advice from practitioners who are known to be expert and experienced in this area. This is something you will only get one shot at and it needs to be got right.
In this article I will deal with the taxation issues. Follow up articles will cover death or divorce, nursing home care and income post transfer issues.
There are four taxes that could come into play namely, Capital Acquisition Tax (Gift Tax), Capital Gains Tax, Stamp Duty and Income Tax.
The vast majority of transfers will not trigger a Gift Tax liability but there are situations that can.
To qualify, a transferee must satisfy a number of conditions such as the post transfer usage test and or an asset test.
These tests will determine if the transferee qualifies for either Agricultural Relief or in the event that the transferee fails to qualify for Agricultural Relief they may qualify for Business Relief.
Either relief will have the effect of reducing the value of the agricultural property (but excluding the farm house in the case of Business Relief) being transferred by 90pc thereby rendering a gift of less than €3.1m in value free of Gift Tax.
The asset test requires that at least 80pc of the gross market value of all of one's possessions, including the relevant gift or inheritance, must comprise agricultural property.
Loans or debts are not deductible with the exception of your principal private residence mortgage. The test is applied on a once-off basis on the date of the transfer
The post transfer usage test in the case of Agricultural Relief can be satisfied if any of the following conditions are met;
- Farm the land as an active farmer for a minimum period of six years, You do not have to have a farm training qualification but you must farm for 50pc or more of your normal working time. If during the six-year period you decide to lease the land, relief will not be withdrawn, provided the lease/lessee satisfies the requirements for the relief for the remainder of the six-year period.
- Be a qualified farmer, i.e., hold a Green Cert or equivalent (or acquire one within four years of the gift or inheritance date) and farm the land for a minimum period of six years. In this instance you are not required to farm the land for 50pc or more of your normal working time.
- Lease the land to an active farmer or to a qualified farmer as defined above. The lease must be for a minimum period of six years and there can be a number of lessees if necessary provided each lessee satisfies the requirements. A lease can be to a company but the main shareholder must be a working director and must farm the agricultural property on behalf of the company.
The post transfer usage test in the case of Business Relief can be satisfied if the farm is taken over and farmed as a going concern for six years.
In this case the transferee does not have to be a qualified or full-time farmer but unlike Agricultural Relief he/she cannot lease out the land to a qualified or full-time during the six years.
It is important to note that this relief is only available where a person fails to qualify for Agricultural Relief.
Capital Gains Tax
Where a farm has been owned and farmed by the transferor for a period of ten consecutive years there will not be a liability to Capital Gains Tax in the case of a family transfer.
Joint ownership between spouses where farm accounts are not being prepared as a partnership or where there is no evidence that one of the spouses was actively involved in the farm business could present a problem on this front.
Establishing that a de facto partnership existed may be a remedy or alternatively transferring the joint ownership share back to the farming spouse may be an option.
Young trained farmers under 35 will be entitled to an exemption from Stamp Duty provided that they farm the holding for more than 50pc of their normal working time for a period of five years.
This will exclude transferees who availed of Agricultural Relief by leasing out the farm to a full-time or qualified farmer or who themselves availed of the relief by virtue of the fact that are qualified farmers but are working more than 50pc of their normal working hours off the farm.
Income Tax will not generally be an issue for farmers who cease to trade because of handing on the farm.
However, farmers who have been on Income Averaging will need to seek advice from their accountant as to whether they should continue in averaging after entering the partnership as recently issued Revenue guidelines on this issue could be interpreted in a number of ways.
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; website: www.som.ie
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