Farm Ireland

Monday 18 December 2017

Take action to cushion budget taxation blow

You can benefit from lower rates by becoming a shareholder in your own farm

The farmhouse constitutes agricultural assets for agricultural relief but does not form part of the business assets, such as cattle, for business relief
The farmhouse constitutes agricultural assets for agricultural relief but does not form part of the business assets, such as cattle, for business relief

Joseph Wall

Most farmers in Ireland operate as sole traders. However, with the hikes in income tax, Pay Related Social Insurance (PRSI) and Universal Social Charges (USC) in last week's Budget, many farmers may be weighing up their options.

Could setting up the farm as a limited company to avail of the lower corporation tax rates really work for a farmer? The decision to incorporate will, as ever, depend on individual circumstances.

What is a sole trader?

A sole trader is a person who trades on their own account. A benefit of being a sole trader is that you retain ownership of the business. However, the big disadvantage is that you are taxed at the marginal rate of tax on all your income.

With all the PRSI and USC charges included, this can add up to a massive 52pc in the 2011 tax year. Corporate taxes, however, are unchanged at 12.5pc.

What is a limited company?

By turning your farm into a limited company, you are becoming a shareholder in your farm. Usually you or your family will be the only shareholders, so you will still control the lot.

However, personal assets, such as your house, are often kept outside or separate from the company's assets. This is important so that the personal assets of the directors or shareholders cannot be seized to pay off company debts.

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The benefits

1) The big upside to becoming a limited company is that a company is taxed on its trading profits at just 12.5pc and taxed on its investment/rental income at 25pc.

2) Increased pension contributions can be made on behalf of the director and treated as a company expense.

3) Liability is limited.

4) Stamp duty on transfer of shares is limited to just 1pc compared to up to 6pc on transfers of assets.

The negatives

1) The money which is retained in the company's bank account is not available for your personal use. Instead, it belongs to the company. If you wish to use this money for your personal use, you will be taxed at your marginal income tax rate (up to 52pc) on the amount of the withdrawal.

The alternative is if the company owes you money by way of a loan, this can be treated as a loan repayment with no additional tax implications.

2) There is a surcharge on undistributed investment/ rental income of effectively an additional 14pc on top of the higher rate of tax of 25pc -- an effective rate of almost 39pc.

3) There are many rules and regulations with regard to loans and transactions between directors or shareholders and the company. For example, loans to directors create a benefit in kind for the director who is liable to income tax at his marginal rate each year until the loan is repaid. If the loan is written off, it is treated as personal income and could be liable to taxes at 52pc.

4) Limited liability can be effectively ignored by banks seeking personal guarantees to cover loans.

5) A limited company must file annual accounts with the companies' registration office, which is normally more costly and time consuming than that of a sole trader. This also means that they can be viewed by any member of the public, and the idea of every Joe Soap being able to see your financial details is not everybody's cup of tea.

6) Income averaging is not an option for a limited company. This is an important tool for minimising tax on many farms in these times of fluctuating returns.

7) Another disadvantage arises if there is an outstanding loan on personal property. If your funds are all tied up in the company you will need to take money from the company to repay the loan. This withdrawal will attract income tax at your marginal rate.

8) Careful succession planning is required. There may be a major impact on reliefs further down the line.

The most obvious is that agricultural relief is not available to the person receiving the shares in a farming company. This relief is vital for farmers passing on the farm to the next generation since it reduces the market value of certain assets by 90pc for tax purposes, provided certain criteria are met.

However, business relief may be available instead. It does almost the same thing as agricultural relief. However, the farmhouse cannot be included.

The farmhouse constitutes agricultural assets for agricultural relief but does not form part of the business assets for business relief. Only those shares in a farming company that draw their value from trading assets qualify.

9) There is potential for a double charge of Capital Gains Tax on disposal of assets.

Irish Independent