“I am just wondering what the implications of forming a company are. Am I liable to capital gains tax (CGT) when transferring assets to the company? What are the effects on pension and entering long-term land leases? How can I take out an average of €50,000 drawings per year? Also, what are the implications when I hope to pass on the farm to my son who will do the Green Cert?”

I have received several queries of late from farmers looking at incorporating their farming trade. It is especially timely at this time of year when farmers discover they have significant income tax liabilities for the previous year in October.

Also, the optimum time from a tax planning view to start trading through the company is early in the new year before any significant income arises, such as the first big milk cheque, so that you can set off as many expenses incurred over the winter towards your personal income tax bill.

Farmers should also be mindful of the cessation rules. If your sole trade business has completely ceased, your profits for the final tax year and the penultimate tax year of trading are revised to actual.

This may give rise to an additional income tax liability, so you should check with your accountant whether this could trigger another tax liability so that you can plan for it with cashflow.

Transfer or lease of land and buildings

At incorporation, land and buildings are generally not transferred into the company but are leased or licensed to the company. However, farmers who are 55 years or over may transfer up to €750,000 worth of assets into the company (or €500,000 where the farmer is 66 years of age or over at the time of transfer) and claim retirement relief from CGT, thereby increasing the value of the director’s loan. A director’s loan arises when a farmer transfers assets into the company so that the company owes him or her for those assets, which the farmer can draw out tax-free from the company over a period of time.

This is offset against the value of any loans which the farmer transfers to the company. Livestock and machinery can be transferred into a company at book value to avoid triggering a tax charge. Basic Payment Scheme entitlements can be transferred to increase the value of the director’s loan subject to ensuring that it does not trigger a VAT charge (currently €37,500) and the transfer is tax efficient from a CGT viewpoint.

For those farmers who cannot avail of retirement relief because they are less than 55 years old, for example, another option available to mitigate the charge to CGT is to avail of transfer of a business to a company relief.

Section 600 of the Taxes Consolidation Act 1997 provides that where a business, together with the whole of its assets (or the whole of its assets other than cash), is transferred to a company by a person as a going concern wholly or partly in exchange for shares, relief from CGT is given to the extent that the consideration for the transfer is in the form of shares. The charge to CGT on any gain arising on the disposal of the assets of the business referable to the shares can be deferred until the shares are disposed of. This relief is not available unless the transfer is effected for bona fide commercial reasons and does not form part of a tax avoidance scheme.

Long-term land leases

For periods up to 31 December 2014, a qualifying lessee had to be an individual in order to qualify a landowner for the long-term lease income tax relief. Consequently, this discouraged many from incorporating as they had to assign the benefit of the lease to their farming company, thereby disqualifying the landowner from the income tax relief.

However, from 1 January 2015 a company may also qualify a landowner for the relief provided certain conditions are met such that the landowner availing of the relief and the persons controlling the company are not connected.

Extracting profits from a company

You should be mindful not to draw so much out of the company that you are paying tax at the high rate on farm income, which would negate the benefit of going in to the company. The tax band for 2016 for a married couple with both spouses earning income is €42,800 at 20% with an increase up to a maximum of €24,800, with the balance taxable at 40%. Therefore, you should seek to limit the rent/salary you draw out of the company to keep within the 20% tax band and if you need to draw out more, you could offset this additional amount against your director’s loan.

Rent

You can extract profits by renting the land/buildings to the company. If the rent is at market value, the company gets a tax deduction and the landowner is taxed on the rent received. The rental income can be sheltered by interest payments on a loan used to buy the land/buildings being leased.

Directors’ loan

As set out earlier, the farmer can lend money to the company rather than investing in shares and the loan can be repaid once the company builds up sufficient reserves. The farmer could also charge commercial interest on any such loan.

Salary

As a director or employee, the farmer can take a salary from the company. As owner-director, the farmer pays class S (self-employed) PRSI at a flat rate of 4% plus USC at up to 7%. The farmer can shelter further income by having the company make pension contributions on his/her behalf.

Aspects around pension planning and succession will be covered in the coming weeks.