We’re a farming family based in Roscommon with around 180 acres and a growing dairy herd. My husband and I have been running the farm as sole traders, and our two adult children are involved in day-to-day operations. Things are going well, and with our recent investments, we expect solid profits this year. A friend mentioned that setting up a limited company could reduce our tax bill. To be honest, we don’t fully understand how it works or what it means for the future of the farm, especially if we’re thinking about handing things over to the next generation in the near future. Could incorporation help us now, or might it complicate succession later?

ANSWER: One of the main reasons farmers consider incorporation is the potential for significant tax savings. A limited company structure allows you to access the 12.5% corporation tax rate, which is much lower than personal income tax rates for sole traders. This can be especially helpful if your profits are steadily growing or if you want to retain earnings within the business to fund future investments – such as expanding your herd, upgrading facilities and yards, or bringing in new technology.

If you’re putting most of your profits back into the farm, a company structure can work in your favour. Less of your earnings go to tax, leaving more in the business to drive growth.

The income averaging angle

As sole traders, many farmers benefit from income averaging, which allows tax to be spread across five years.

This can be a great support in volatile sectors like dairy or beef. However, once you incorporate, you exit income averaging, at which point a cessation adjustment arises.

Revenue will assess your profits up to the point of cessation/incorporation. Where this can be timed, to say mid-year, this result in a lower tax bill in the year of transition.

However, the penultimate year is increased to the actual profit, if this is higher than that under income averaging treatment.

How it works in practice

The table below is an example of a farmer on averaging treatment, who ceased in mid 2019. The 2019 tax is based on the actual profit to date of cessation of the sole trade. The profits for 2018 are revised up to the actual profits of €54,000, an increase from the averaged figure, which would have been €48,000.

On cessation of a sole trade in 2019, tax is based on actual profits earned that year. The prior year must also be reviewed. As 2018 profits (€54,000) exceeded the averaged assessment (€48,000), the 2018 tax return must be amended to reflect actual profits rather than averaged figures.

The corporate tax angle

It is important to remember the company has a separate legal identity to you. It is taxed independently, and any money you receive from the company, (including sums on which 12.5% Corporation Tax has been paid) are generally subject to personal income tax, at your marginal rate.

While the Corporation Tax rate is lower, it is only advantageous if you don’t need to take all the money out of the business for personal use and can reinvest large sums in the farm instead.

You’ll also transfer assets such as livestock and equipment into the company, often at written-down value. In certain cases, this can also be structured to allow repayments from the company to you in a tax-efficient manner.

Succession implications

This is where it’s essential to pause and plan. Incorporating changes the legal structure of your business from personal ownership to shareholding. That’s not necessarily a bad thing, but it does change how you pass on the farm.

Considering your succession plan before incorporating is critical. Instead of transferring land or stock to your children, you’ll likely be transferring shares in the company.

This can offer more flexibility, such as phased succession or differing levels of control. But it also requires thoughtful planning around inheritance tax as well as the succession of management and decision-making on the farm. A structure that saves tax today shouldn’t cause confusion or conflict tomorrow.

Incorporation isn’t a one-size-fits-all solution. The decision should align with your long-term goals, not just this year’s tax bill. There are also annual compliance costs to consider.

You should sit down with a financial and legal advisor who knows farm succession inside-out. They’ll help you balance today’s tax opportunities with tomorrow’s legacy.

The key now is to get the right advice and take action early, so you can protect the farm and plan with confidence.

Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness.