With strong trade in single farm payment entitlements under way until May 15 when the trading window will close for this year, it is important to weigh up the financial implications in any such deal.
A sale, lease, gift or inheritance of entitlements will give rise to various tax considerations. The transfer of an interest in entitlements may occur in the context of a sale on the open market between farmers or a lease between connected parties such as a farmer leasing entitlements to his farming company.
Transferor -- Sale or Gift of Entitlements
• Capital Gains Tax: When a person sells or gifts entitlements during their lifetime, they may be subject to Capital Gains Tax (CGT) currently at a rate of 30pc. CGT is levied on the difference between the amount paid for the entitlement and the amount received on a disposal or the deemed market value where there is a voluntary transfer of entitlements. For example, if a farmer acquired entitlements automatically in 2005 by virtue of having farmed during the 'reference years', he will be deemed to have acquired those entitlements at a nil base cost. If he sells them this year for €20,000, the full amount of the proceeds will be liable to CGT at 30pc. However, if he purchased those entitlements in 2007 for say €40,000 and sells them this year at the open market value, which say for example is €30,000, he will have no CGT to pay and will have an allowable loss of €10,000 to set off against any farming gains.
Further, a farmer may be able to avail of CGT Retirement Relief on the transfer of entitlements where they are disposed of at the same time and to the same person as land, to the extent that the land would support a claim to payment in respect of those payment entitlements. In order for land to qualify for the relief, the general rule is that land must have been owned and farmed for 10 years ending with the disposal subject to some exceptions. If entitlements are transferred under a person's will or otherwise on their death, no liability to CGT occurs.
Value Added Tax
If proceeds from the sale of payment entitlements without land exceed the relevant threshold for registration, currently €37,500, then VAT at 23pc will be levied on the proceeds. A farmer who exceeds the threshold by virtue of selling payment entitlements will be permitted to register for VAT in respect of that single transaction.
Non-VAT registered farmers who purchase payment entitlement and suffer VAT will not be permitted to register in respect of the single transaction but will have the normal registration option open to them.
Transferee -- Gift or Inheritance of Entitlements
• Gift/Inheritance Tax: If a person receives entitlements whether by way of gift or inheritance, they may be liable to Gift Tax or Inheritance Tax currently at 30pc.
However, they may offset the value of the entitlements against their tax-free thresholds, which in a parent/child situation is €250,000. Currently, a child can inherit €250,000 worth of assets from their parents during their lifetime without incurring liability to gift/inheritance tax.
An important relief from gift/inheritance tax is Agricultural Relief, which applies to reduce the market value of assets for tax purposes by 90pc. A person may avail of Agricultural Relief if the value of their assets after taking the gift/inheritance is comprised 80pc by agricultural property (the 'Farmer Test'). A payment entitlement is deemed agricultural property for the purposes of the relief and can therefore qualify for Agricultural Relief.
For example, if a child is gifted entitlements worth €50,000 and the child qualifies for Agricultural Relief, the entitlements are valued at €5,000 for gift tax purposes and are offset against the €250,000 tax-free amount from his parents, which results in no gift tax to pay and €245,000 left to avail of in the tax-free amount from his parents. If the transferee does not satisfy the Farmer Test they may still be able to avail of Business Relief in order to reduce the market value of the entitlements for tax purposes by 90pc.
Currently, no stamp duty is payable on the sale, transfer or other disposition of a payment entitlement.
Income Tax Issues
The single payment is liable to tax as income under Case I (trading income) or Case IV (other income) from which no deductions are available for tax purposes. The fact that a recipient of a single payment carries on a trade, the profits or gains of which may otherwise be wholly or partly exempt from tax, does not confer any exempt status on the single payment (eg, forestry).
However, the income tax exemption in respect of the lease of certain farmland also provides exemption from income tax in respect of receipts for single farm payments.
In a lease situation, income received in respect of the lease of land will be taxed under Case V (rental income), while income received in respect of the payment entitlement will be taxed under Case IV (other income) as miscellaneous income.
Even if agreements between lessors and lessees do not apportion the amounts payable in respect of land and in respect of payment entitlement, the lessor will be obliged to identify the amount received for payment entitlement separately when making a tax return, but rental receipts in respect of both will generally be subject to tax at 25pc.
The cost of acquiring a payment entitlement will not be allowed as a deduction for income tax purposes, being expenditure of a capital nature. Capital allowances are not available. However, where interest is incurred on a loan taken out wholly and exclusively for the purpose of acquiring payment entitlements, this interest is tax deductible.
When assessing the commercial viability of purchasing or selling entitlements it is important to take the tax considerations into account and not to place too much emphasis on the CAP reform proposals currently on the table, which many commentators have highlighted will be subject to change.
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. www.agriculturalsolicitors.ie