Why failure to get a grip on farm succession can be a very costly mistake
Capital Gains Tax bills can run in to six figures in cases where farmers haven't made a will and mapped out a clear farm succession strategy
'I'd been chasing a man for years to make a will and he eventually said I'm coming in to you next week to make a will. The poor man passed away over that weekend and his brother ended up paying €250,000 in tax. If he had been able to manage his will, the tax would've been €30,000."
This salutary tale was related by solicitor James Staines at a recent IFA succession meeting in Mallow, Co Cork where he addressed the taxation and legal consequences associated with not having a proper will and farm succession plan in place.
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IFAC partner Stuart Crowley also detailed to farmers how important it is to tax-proof your will and that "the timing you cease farming" can have implications on tax and different agricultural reliefs available to you and your successor.
He outlined that Capital Gains Tax (CGT) is the only tax involved in inheritance and that for lifetime transfer of land there is Capital Acquisition Tax (CAT) for the person getting the farm and possible stamp duty, while the transferrer is liable to CGT.
While there is only one tax involved with inheritance, he says that doesn't mean it is the best option from an agricultural relief and tax point of view.
"The reality of a lifetime transfer is you have control of the transaction because nobody knows the day they are going to die. While there's more taxes involved, it can actually be better to transfer during one's lifetime," pointed out Mr Crowley.
He added that €320,000 is the Class A threshold that you can get from a parent without getting taxed, the Class B threshold is €32,500 when land is transferred to an uncle, aunt, brother or sister and Class C is €16,000.
He reminded farmers that the €320,000 threshold from parents are aggregated. For example, if you transferred a site to your son or daughter ten years ago and that site is valued at €100,000, that €100,000 is deducted from the €320,000 threshold.
Mr Crowley told farmers that agriculture and business relief apply regardless if it's a lifetime transfer or an inheritance. He said under certain circumstances cash gifts can qualify as an agricultural asset by making a condition that it is used to purchase agricultural property.
"It gives them a window, a time of two years that they can invest that money in an agricultural asset," said Mr Crowley.
"Therefore it's an agricultural asset and qualifies for agricultural relief which reduces the value of that cash gift by 90pc."
To qualify for Agricultural Relief it is necessary to be classed as an active farmer. An active farmer is someone who has an agricultural qualification or a Green Cert and farms commercially or spends more than 50pc of their time farming. 50pc of your time farming is classed as 20 hours a week. 80pc of your assets also have to be farming related in order to be a candidate for Agricultural Relief.
Business Relief is another option successors can try to avail of. Once you qualify for Business Relief, 90pc of the value of the business is ignored for tax purposes. However, Mr Crowley stated that you can't look to apply for Business Relief and then lease the land because leasing the land is not deemed to be seen as carrying on the business.
In terms of a favourite niece/nephew, successors can avail of the €320,000 threshold similar to a parent, but need to have been working for 15 hours a week for five years in the business to qualify.
Where difficulties arise here are where an uncle has land and allows a nephew to farm it with no agreement or payment in place.
"It's called free use of land but for argument's sake, that land is 100 acres and makes €250/acre on the open market -that's €25,000. The nephew is deemed to be getting free use of land, worth €25,000, every year while using that land. So that is taxable," added Mr Crowley.
In relation to retirement relief, Mr Crowley explained that it is a mechanism that allows the transfer of the land without paying CGT on it. However, in order to qualify you have to be over 55 and have owned and farmed the land for ten years up to the day of disposal.
"Difficulties arise here when land may have been put in joint names. While the husband may have owned and farmed it, his wife may not have owned it for that period of time and won't qualify for the relief.
"It's very important. We have to be sure people qualify for these reliefs before the transfer happens.
"Three months ago I had elderly clients in and they were adamant the land was in the husband's name. They were certain but when we got the deed, it was in both of their names.
"Straight away we'd an issue over CGT. To qualify you have to have owned and farmed land up to ten years before disposal."
Meanwhile, a maximum of €3m in Retirement Relief is available when land is transferred to a son or daughter and €750,000 if it's transferred to somebody outside the family without paying CGT.
Mr Crowley also added that farmers get "very confused" about the 35 age limit for stamp duty relief and they think they cannot qualify for other reliefs once they are over 35, which he said is not true. He also urged farmers transferring land during their lifetime to look after themselves and not get rid of all their land straight away as they will need an asset to live off.
Home-made wills and 'daughters-in-laws fears'
Home-made wills and fears about daughters-in-laws are just some of the succession queries that solicitor James Staines receives from farmers on a daily basis.
Mr Staines says that every will he has seen which was made at home over the last 30 years has been done wrong and urged farmers to visit their solicitor when drawing one up, but acknowledges that it can be a difficult activity to face.
"People are afraid to address farm succession and wills because they have to address their mortality. I remember at one legal seminar a few years ago I asked the room, 'who here is not going to die?' - and two people put up their hands," says Mr Staines.
"Another man I met who was very ill was adamant that he would not make a will. I asked him why and he said everyone he knew who made a will had died.
"But if you don't organise your affairs and you refuse adamantly to make a will, two-thirds of your farm will go to your spouse and one-third will be divided equally among your children."
Mr Staines added that farms and families can be ripped apart if wills aren't made. "If you don't make a will it could cause chaos. You could have a spouse who doesn't want one of the children to get the farm. If you've no spouse it will be divided equally among children and if you've no children it will go to a sibling or niece/nephew and can get splintered quite quickly."
The solicitor who runs the IFA legal helpline also says that a third of legal queries he receives are related to succession and more often than not farmers are considering transferring the farm to their son who is in his thirties - but they don't like the daughter-in-law.
"Sometimes they don't like her because she is from the other side of town or from rough people," he says. "Unfortunately if you transfer the farm to a son and if there is a marriage breakdown that farm is going to be on the block.
"Transferring part of the farm to the son first and seeing how it goes first can help people gain confidence in daughters-in-law."
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