S ingle Farm Payments replaced the old subsidy scheme and were the main EU support for Farmers for 2005 onwards. With the introduction of the new BPS, the issue arising is that certain people who have leased out their entitlements have no option but to sell entitlements and thus face the tax consequences. In this article I will deal with the various tax issues.

Capital gains tax

1.1 Payment entitlement: This is a chargeable asset for capital gains tax and it may be disposed by way of sale or gift. Accordingly, capital gains tax will arise on the disposal of the entitlement. The payment entitlement came into existence on 1 January 2005 and it did not exist before that date. Therefore, the base cost from a capital gains point of view is zero. The entitlement does not form part of the land for capital gains tax purposes, it is a separate asset. It has also been confirmed that the payment entitlement was not a wasting asset.

1.2 Reliefs available: A payment entitlement is a qualifying asset for retirement relief purposes and must be disposed of at the same time and to the same person as the land which supports a claim in respect of that entitlement. Therefore, the only case where it will qualify for retirement relief is where one can dispose of the asset without capital gains tax where certain conditions are met is where it is disposed of with the land.

1.3 Sale of leased entitlements: Where entitlements are sold they are liable to capital gains tax. Capital gains tax applies on the market value of the entitlement. The market value is the value that the entitlements would expect to fetch on the open market. However, if the entitlements were leased with land, one may be able to argue that there is not an open market for the entitlements, there is a restricted market and the only purchaser is a farmer who has been leasing the land. In this case and in all cases an independent valuation of the entitlement should be obtained. With this independent valuation, one can then calculate the capital gains tax.

Capital Gains Tax will apply on the sale and/or gift of entitlements. A gift is a disposal for capital gains tax and whether money is received or not will be liable to capital gains tax.

Example: John gifts his entitlements with value of €20,000 to the farmer who is leasing the land. John will have to pay capital gains tax on the €20,000. John will be entitled to the annual capital gains tax exemption of €1,270, therefore the liability will be as follows:

€20,000 minus €1,270 = €18,730 at 33% €6,180.90

This tax is due by 15 December 2014 and will need to be paid by this date.

Capital acquisitions tax

Transfer of entitlements whether by gift or inheritance are liable to capital acquisitions tax as are any other assets and are subject to normal rules.

2.1 Agricultural relief: This can apply to agricultural property. A payment entitlement is listed as an asset and therefore can qualify for agricultural relief. If it fails to quality for agricultural relief it may qualify for business relief provided it is transferred with other business assets. The transfer of the entitlement as an individual asset will not qualify for business relief.

Example: John gifts the €20,000 to Bill. Bill is a farmer and meets the necessary conditions for agricultural relief. As Bill meets the conditions, Bill will claim relief on the €20,000 reducing the value by 90% to €2,000. The amount Bill is liable to tax on is €2,000. However, as this is covered by the annual gift exemption of €3,000, Bill has no liability. Bill will be required to make the necessary capital tax acquisitions tax return by 31 October 2014.

Use of Offset: If Bill did have a gift tax liability, a raelry used relief, offset of the CGT by John can be used.

Stamp duty

An exemption from stamp duty on the sale of entitlements applies. This exemption applies to instruments executed on or after 1 January 2005 and therefore no stamp duty will apply.

Value added tax

Sale of Entitlement only: If the payment of the entitlement is sold without land, then VAT will be due at the standard rate of 23% on the sale. If the proceeds exceed the relevant threshold for VAT registration, currently €37,500 per 12-month period, registration is required. A farmer who exceeds the threshold by virtue of selling entitlements will be permitted to register for VAT in respect of that single transaction. Non VAT registered farmers who purchase payment entitlement and suffered VAT will not be permitted to register in respect of the transaction but will have the normal registration option open to them.

Sale of Single Farm Payment entitlement with land

There is no VAT liability on the sale of the entitlement where it is sold with land to another farmer who continues the business of farming.

Where the entitlements are gifted for no consideration, no VAT liability applies.