“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?”
There is a significantly higher level of funding allowable in a company pension plan compared with a self-employed pension plan. For individuals aged 50 and retiring at 65, the company can contribute up to 126% of its salary in to a pension plan v 30% as a sole trader. For individuals aged 40 retiring at age 65, the company can contribute up to 76% of salary to a pension plan v 25% as a sole trader. Company-paid pensions are still considered to be the most tax-efficient method of moving company monies to personal ownership as they do not attract income tax, PRSI or USC.
The contribution is also treated as an expense on the company’s balance sheet, which currently attracts 12.5% corporation tax relief. Self-employed pensions only attract income tax relief at the individual’s marginal rate of tax (either 20% or 40%) – there is no relief for PRSI or USC.
Another point to note is that pension funding is not restricted by an earnings cap where the company is contributing, whereas a sole trader is restricted to an earnings cap of €115,000.
When it comes to retirement, there are more options to extract tax-free cash from the company pension compared with a self-employed pension.
It should be noted that the maximum pension fund allowed (without incurring penalties) is capped at €2m for both a company and self-employed pension. Pension planning can be complicated and it is therefore important to seek professional advice from a qualified financial adviser before making any decisions on retirement planning.
Succession
In most situations, there are three taxes to be mindful of in transferring the land/buildings and shares in a farming company: CGT, capital acquisitions tax (CAT) and stamp duty.
CGT retirement relief
Farmers 55 years of age or over can claim retirement relief from CGT where they have owned and farmed the land for 10 years prior to transfer.
Land owned by the farmer but used by the company can qualify for relief provided that the farmer disposes of the land at the same time and to the same person as the qualifying shares. Shares in the farming company can qualify for the relief provided:
The farmer disposing of the shares has been a working director in the farming company for 10 years immediately prior to disposal and five of those years must have been spent as a full-time working director.The farmer disposing of the shares must own at least 25% voting rights or the shares must be shares in a family company in which members of the family hold at least 75% of voting rights and the farmer has at least 10% of the voting rights.As the shares must have been owned by the farmer for at least 10 years ending with disposal, the move to a farming company generally delays succession plans until this 10-year time requirement is met.
Consequently, it is intended to transfer the family farm to the next generation in the next couple of years.
You should consider transferring the farm and let the next generation form the farming company.
CAT business relief
Business relief operates like agricultural relief whereby it reduces tax payable on relevant business property (RBP) by 90%. RBP includes land, buildings, etc, owned by the farmer but used for purposes of the farming company.
Land and shares in the farming company must be taken as a gift/inheritance by the same beneficiary from the same disponer, eg father/mother at the same time to qualify.
Shares will qualify as RBP provided the beneficiary will own more than 25% of voting rights or control the company after the gift/inheritance. RBP must have been used by the company for a minimum of five years prior to a gift or a minimum of two years prior to an inheritance.
Stamp duty young
trained farmer relief
The rate of stamp duty on shares is currently 1% of the value of those shares and 2% on non-residential property. However, for those beneficiary’s that qualify for young trained farmer relief, the transfer of agricultural land (including agricultural buildings) is exempt from stamp duty. To avail of the relief, the beneficiary must satisfy the following conditions:
Must be under 35 years of age at the date of transfer and meets certain educational requirements.Must spend not less than 50% of his/her normal working time in farming the land and retain ownership of the land for five years.Where the training conditions have not been satisfied at the date of transfer, the beneficiary must pay the stamp duty but can apply for a refund when the educational requirements are satisfied within four years of the transfer.
In summary, it is possible that the farming company can be passed on to the next generation and all the agri tax reliefs availed of provided that it is structured correctly.
“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?”
There is a significantly higher level of funding allowable in a company pension plan compared with a self-employed pension plan. For individuals aged 50 and retiring at 65, the company can contribute up to 126% of its salary in to a pension plan v 30% as a sole trader. For individuals aged 40 retiring at age 65, the company can contribute up to 76% of salary to a pension plan v 25% as a sole trader. Company-paid pensions are still considered to be the most tax-efficient method of moving company monies to personal ownership as they do not attract income tax, PRSI or USC.
The contribution is also treated as an expense on the company’s balance sheet, which currently attracts 12.5% corporation tax relief. Self-employed pensions only attract income tax relief at the individual’s marginal rate of tax (either 20% or 40%) – there is no relief for PRSI or USC.
Another point to note is that pension funding is not restricted by an earnings cap where the company is contributing, whereas a sole trader is restricted to an earnings cap of €115,000.
When it comes to retirement, there are more options to extract tax-free cash from the company pension compared with a self-employed pension.
It should be noted that the maximum pension fund allowed (without incurring penalties) is capped at €2m for both a company and self-employed pension. Pension planning can be complicated and it is therefore important to seek professional advice from a qualified financial adviser before making any decisions on retirement planning.
Succession
In most situations, there are three taxes to be mindful of in transferring the land/buildings and shares in a farming company: CGT, capital acquisitions tax (CAT) and stamp duty.
CGT retirement relief
Farmers 55 years of age or over can claim retirement relief from CGT where they have owned and farmed the land for 10 years prior to transfer.
Land owned by the farmer but used by the company can qualify for relief provided that the farmer disposes of the land at the same time and to the same person as the qualifying shares. Shares in the farming company can qualify for the relief provided:
The farmer disposing of the shares has been a working director in the farming company for 10 years immediately prior to disposal and five of those years must have been spent as a full-time working director.The farmer disposing of the shares must own at least 25% voting rights or the shares must be shares in a family company in which members of the family hold at least 75% of voting rights and the farmer has at least 10% of the voting rights.As the shares must have been owned by the farmer for at least 10 years ending with disposal, the move to a farming company generally delays succession plans until this 10-year time requirement is met.
Consequently, it is intended to transfer the family farm to the next generation in the next couple of years.
You should consider transferring the farm and let the next generation form the farming company.
CAT business relief
Business relief operates like agricultural relief whereby it reduces tax payable on relevant business property (RBP) by 90%. RBP includes land, buildings, etc, owned by the farmer but used for purposes of the farming company.
Land and shares in the farming company must be taken as a gift/inheritance by the same beneficiary from the same disponer, eg father/mother at the same time to qualify.
Shares will qualify as RBP provided the beneficiary will own more than 25% of voting rights or control the company after the gift/inheritance. RBP must have been used by the company for a minimum of five years prior to a gift or a minimum of two years prior to an inheritance.
Stamp duty young
trained farmer relief
The rate of stamp duty on shares is currently 1% of the value of those shares and 2% on non-residential property. However, for those beneficiary’s that qualify for young trained farmer relief, the transfer of agricultural land (including agricultural buildings) is exempt from stamp duty. To avail of the relief, the beneficiary must satisfy the following conditions:
Must be under 35 years of age at the date of transfer and meets certain educational requirements.Must spend not less than 50% of his/her normal working time in farming the land and retain ownership of the land for five years.Where the training conditions have not been satisfied at the date of transfer, the beneficiary must pay the stamp duty but can apply for a refund when the educational requirements are satisfied within four years of the transfer.
In summary, it is possible that the farming company can be passed on to the next generation and all the agri tax reliefs availed of provided that it is structured correctly.
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