Future planning is essential in farming in order to ensure the transfer of the farm in the most tax-efficient way possible.
Tax is a big factor when transferring a farm for both the transferor (usually the parents) and the transferee (usually the child).
However, it is also very important to consider that for many farmers, the land is their sole source of income. Therefore, it is essential to include a financial plan for how the transferor is going to fund themselves for the rest of their life.
The importance of pensions
Pension planning is the obvious option when gearing up for your future and the possibility of handing over your farm. Unfortunately, building a pension pot to suffice 20 to 30 years of living often takes many years of contributions and starting this late in life can make it tough. Pensions, in my opinion, should be started as young as possible to build a decent income for you to receive on retirement.
A small amount over 30 years can almost double in value and provide you with a healthy living situation on handing over the farm.
However, often pensions can be of a lower annual income and may not provide a satisfying living environment, so it is important to plan for this and consider all options when transferring the farm.
More often than not, a farmer will transfer their farm and remain helping out on the farm on a full/part-time basis. When this happens, a farmer can be employed by the successor and receive a weekly/monthly wage to make up the deficit from a previous living wage to their new pension wage.
When someone has worked hard their whole lives it is important, that they are well looked after and provided for when they decide to retire or hand over the farm. If a farmer remains working on the farm, they are more than entitled to receive a wage for their work and it will provide a steady income on top of their pension.
Consider a farm partnership
A succession partnership could also be a viable option if the transferor doesn’t plan on stepping back from farming 100%.
It is a partnership where the farm is transferred over a five-year period where the profit split is increased in the transferee’s favour over the five years. It provides a tax credit of €5,000 each year for the five years therefore, reducing tax.
It also allows the transferee to get up and running on the farm and provides extra cash flow to be divided between each partner.
This is a very common option as it allows the transferor to phase out of farming gradually, it also helps the transferee get up to speed and take over the reins of the farm while simultaneously providing financial stability for the first five years.
Other payment options
Two of the less common options are a lifetime payment from a farm and the small gift exemption. A lifetime payment from the farm is by no means a lesser option but there are different stumbling blocks attached to it.
A lifetime payment is an annual payment made to the transferor and this is written into the deeds of the land on transfer. It provides income protection for the transferor, but it is subject to income tax, so tax planning is important when determining the figure for the annual payment.
It is also important to discuss this with the person receiving the farm as it may cause future legal problems if the farmer plans to use the deeds of the land as security against a loan.
There is an additional legal element to this that should be considered and discussed with your solicitor.
Small gift exemption
A small gift exemption may not be enough to supplement previous income received from the farm, but it should be considered when taking all options into account.
A small gift exemption is an annual €3,000 gift that can be paid from the farmer to the transferor tax-free.
This is great for the person receiving the €3,000 however the transferee paying out the €3,000 cannot use this as a taxable deduction. It is important to note that any individual can gift another individual €3,000 annually so if the person receiving the farm has a husband/wife, both spouses may gift the person who transferred the farm €3,000 each annually resulting in a tax-free gift of €6,000 each year.
The most common options availed of are succession partnerships and wages. However, all options should be considered when planning for the future.
Each option will suit a different situation depending on circumstances and financial planning is paramount to the future of an individual handing over their farm.
Jerry O’Neill is a qualified ACCA accountant based in Bandon, Co Cork. If you have a query for Jerry, email email@example.com