Government and EU policy is very much focussed on encouraging farmers to hand over or share the reins with the next generation sooner rather than later. This is evidenced by the various attractive incentives such as the Stamp Duty exemption and the Succession Farm Partnership Scheme, along with various schemes to grant young farmers access to higher rates of grants and subsidies. Such aids are very welcome but in many instances the farmer is reluctant to transfer his land because the financing of his existence post transfer may present a challenge. Many will wait until they are eligible for the State Pension which means that their successor could be in his or her early 40s by that stage. In any event, most farming couples will not survive on the State pension alone so how does one deal with this aspect of succession?
In many cases, the transferor will not intend to fully retire and will need his/her income post-transfer supplemented to a greater or lesser extent from the farm.
Transferring of itself may not increase the farm income, so the farmer and his successor may be hoping to pull funds from the same pot that existed pre-transfer.
In other cases where the successor intends to lease to a full-time or qualified farmer, it may be the intention that all or part of the rent would be channelled back to the transferor.
The reality is that there will be a variety of circumstances where there is a requirement to share the profits or income from the land and there are a variety of solutions and methods of dealing with the matter.
Where the transferor intends to have an ongoing involvement the most common structure that is recommended is a partnership.
The fact that a transferor may be in receipt of the State pension, either currently or in the future, is not a problem as the vast majority of State pensions are now contributory and non-means tested. Partnerships are flexible structures, and salaries or profit shares can be allocated in a manner that accommodates circumstances, need and prudent tax planning.
An alternative to a partnership is for the successor to simply pay a wage to the transferor. I will outline later in this article how, in certain circumstances, this can be quite tax efficient.
If the transferor is worried about the surety of his successor providing him with an income, it is possible to enter a charge on the title deeds to this effect.
Such conditions are generally not recommended as they may have bank security implications for the successor and Fair Deal Scheme eligibility implications for the transferor.
Whether it is possible to increase the farm income or not, it is essential that the manner in which the income is shared is dealt with by way of a tax efficient structure. Such structures might involve:
* Using the over 65s tax exemption
* Using the Succession Farm partnership
* Optimum use of low tax bands.
* Using the Small Gift Exemption
OVER 65s TAX EXEMPTION
The vast majority of transferors are over 65 and as such are entitled to earn up to €36,000 free of tax in the case of a married couple or €18,000 in the case of an individual.
So, in the case of a married couple whose pension income is €24,952 - comprising the contributory state pension, along with the qualified adult allowance - there is scope to earn a further €11,048 (presumably from the farm or a private pension) without incurring a tax liability.
Typically, the farm contribution can be by way of a wage or rent where the transferor has retained some land.
Such rent will not be tax exempt where the land is rented to one's child but is exempt where land is rented to a niece or nephew.
SUCCESSION FARM PARTNERSHIP
Partnerships are probably the most efficient and effective structure to accommodate life before and after transfer in many family farm situations.
The Succession Farm Partnership Scheme provides a tax credit with a cash value of up to €5,000 per year for a five-year period, at least three of which must be before the farm is transferred.
This is a worthwhile scheme, not just from a financial perspective, but also because it encourages family partnerships prior to farm transfer .
This can pave the way for the transferor to eventually scale back his involvement at a pace of his choosing.
OPTIMUM USE OF TAX BANDS
Where the parent(s) intend to retain an active involvement in the farm post-transfer, the efficient distribution of profits from an income and a tax perspective can be important.
This can be very relevant where the successor is earning an off-farm income and paying tax at the high rate.
Apart from the fact that the parent may require an income from the farm, the transferee will not want to contribute over half of the farm profit to the tax man.
Directing farm profits towards the parent by way of salary or profit share in such cases will generally represent a significant saving in tax, USC and PRSI (if the parent is over 65).
THE SMALL GIFT EXEMPTION
An arrangement that is commonly employed is that the successor simply gifts money to the parent (transferor) either regularly or intermittently.
Gifts of up to €3.000 annually from one individual to another are tax free so in a case where a married son has taken over the farm and his parents need some income supplementation.
This means it would be possible for the son and his wife to give each parent €6,000 thereby contributing a total of €12,000 tax free to the parents.
However, it should be noted that the gifts will not be tax allowable for the son and his wife.
This may be relevant to the couple who want to stay within the €36,000 tax exempt threshold, but actually need €42,000 per annum to meet their personal and household needs.
In such cases the successor could gift each parent €3,000 free of tax each year.
While the gift would be drawn from after the successor's tax income, it would save the parents €2,400 in income tax.