Read small print of taxation reports and avoid paying fortune in Capital Gains Tax
There was a nervous wait last Tuesday for Minister Noonan to announce the much-anticipated reform of the capital tax system. It was speculated that the rates of stamp duty for agricultural land transfer would be reduced but, on the other hand, it was expected that gift tax would be increased.
There was a window of opportunity of a few hours from the minister's speech on Tuesday afternoon to midnight when farmers knowing the 'old' and 'new' tax rules could decide which ones to fall under, depending on which rules saved them most tax. The difference of signing Deeds of Transfer on the Tuesday under the old tax system and Wednesday under the new tax system had the potential to save thousands in tax where the farming son/ daughter did not qualify for young trained farmer stamp duty relief -- and thankfully the gamble paid off for those farmers that decided to wait.
The Commission on Taxation Report, which was published on July 31, 2009, recommended a cut from 90pc to 75pc on the value of the business which should be allowed before tax is calculated and further a cap of €3m on the limit of relief from gift/inheritance tax. In addition, the report suggested that a condition of the relief should be that a farm asset is owned and operated as a farm for a period of six years after the transfer. Currently, a clawback will only arise if the land is sold or compulsorily acquired within six years of the date of the benefit.
However, none of these recommendations were implemented last Tuesday. Given the focus of the Department of Agriculture on land mobility and getting land into the hands of young, innovative, ambitious and prospective farmers, it is disappointing that the provision requiring the land to be owned and operated as a farm to avail of agricultural relief was not introduced.
To put it bluntly, a person with no agricultural background or qualifications, who is working and living full-time in Dublin and earning an annual salary of €100,000, can be gifted or inherit land worth €2.5m down the country and pay no gift tax because they can be considered a "farmer" and avail of agricultural relief (see the table, above).
The Commission on Taxation Report recommended that Capital Gains Tax (CGT) relief for family transfers should be continued but limited so that it applies to asset values up to €3m. Budget 2012 has restructured the retirement relief available on CGT.
As of January 1, 2014, for those farmers aged 66 and over, an upper limit of €3m will be introduced on family transfers, compared to an unlimited amount at present. On non-family transfers, the current limit of €750,000 will be reduced to €500,000.
Applying the new limits from January 1, 2013, allows farmers already aged 66 and over to plan the orderly transfer of assets to the next generation. It is important to remember that these new measures do not mean that a farmer has to cease farming altogether beyond the age of 66, but it allows them to plan for a phased gradual transfer of assets to the next generation.
It has been suggested that retirement relief was restructured in order to encourage farmers around the normal retirement age, who have successors, to transfer their land and buildings to the next generation.
However, an anomaly has arisen. A farmer is no worse off if he transfers land valued at less than €3m either before or after his 65th birthday because the child has to pay gift tax as soon as the market value of the land exceeds €2.5m (assuming the child can avail of agricultural relief). If a child has to pay gift tax at 30pc, it could serve as enough of a disincentive not to transfer the land.
Presumably, they would be better off waiting to see if the tax-free threshold -- currently at €250,000 -- would increase perhaps to its former glory in early 2009 of €542,544. In other words, in 2009 a child could be gifted land valued in excess of €5.4m tax-free, whereas now they have to pay tax once the value exceeds €2.5m (assuming the child can avail of agricultural relief).
A greater incentive for land mobility came in the form of a new incentive relief from CGT introduced for the first seven years of ownership on properties bought between Budget night and the end of 2013. Where such property is held for more than seven years, the gains accrued in that period will not attract CGT.
Further details of the relief are expected in the Finance Bill in the early part of next year and it will be interesting to see whether the definition of properties includes agricultural ones. If the relief does apply to agricultural land, it could provide a great opportunity for young, ambitious farmers to expand as they did in the past 20 years in New Zealand, where they had no CGT to pay on disposals of farmland.
The Commission on Taxation Report recommended a move away from stamp duty where tax revenues are contingent on the level and value of property transactions. This recommendation appears to have been borne out in the Budget, where the rates of stamp duty on farmland and commercial premises has been reduced from a top-rate of 6pc to a flat-rate of 2pc, or 1pc in the case of transactions between relatives (until January 1, 2015). Similarly, the National Recovery Plan recommended an increase in the standard rate of VAT from 21pc to 23pc by 2014. This was all achieved in Tuesday's Budget in one fell swoop.
The new stock relief incentive to encourage farm partnerships has been cited as one of the most significant new measures introduced in Budget 2012. For registered farm partnerships, the current rate of 25pc stock relief will increase to 50pc and for certain young trained farmers entering such partnerships, a rate of 100pc stock relief will be available. In any event, pre-Budget, a young, trained farmer could avail of 100pc tax relief of any increase in stock values for the year in which the individual begins farming, and for three successive years.
Young, trained farmers' stock relief for individuals is due to expire on December 31 next year. It will be interesting to see if the relief will be extended or whether it will now only be available for young, trained farmers involved in a registered farm partnership. Given the support for farm partnerships within the Department of Agriculture, it is likely that further tax incentives will be introduced in coming budgets to encourage more farming partnerships.
While the taxation measures announced in Budget 2012 reflect the Government's commitment to the agri-food industry and in particular to the expansion planned in the Food Harvest 2020 strategy, a detailed review of the provisions shows some work has been done to achieve targets -- but there is a lot more to be done.
It appears that recourse has been had to the Commission on Taxation Report and the National Recovery Plan in implementing changes, and it is worth casting an eye over these reports to see what other measures potentially might come in future budgets.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, solicitor, tax consultant and Nuffield scholar Aisling Meehan does not accept responsibility for errors or omissions howsoever arising. Call 061 368412
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