I have heard that transferring my farm business into a limited company can help lower my tax bill, but I don’t know much about it or whether it applies to me. We have a farm in Kildare and are currently milking just under 120 cows.
The farm has been going well the past few years and we hope to expand. While we’re thankful to be doing well, we are looking at our potential tax bill this year and wondering if there is a way to minimise it. We’re currently set up as a sole trader, so is a limited company a good option? What would the consequences be for the business down the line?
ANSWER: Incorporation can be a very effective tool in the right circumstances, but it is not a silver bullet and it certainly doesn’t suit every farm.
At your scale – 120 cows, good profitability and expansion ambitions – incorporation is worth serious consideration. The key, however, is understanding why you are considering incorporation, rather than focusing solely on the tax bill for the current year.
Income averaging
As a sole trader, income averaging is usually the first line of defence. It works well where profits fluctuate, smoothing tax over good and bad years Income averaging does not reduce overall tax; it simply spreads it, and in falling profit cycles this can become a disadvantage.
If profits fall after several strong years, an averaging clawback can arise. One way to exit income averaging is to cease trading as a sole trader – for example, by incorporating.
The main attraction of incorporation is access to the 12.5% corporation tax rate on trading profits. This compares to a marginal personal tax rate that can exceed 55% once income tax, USC and PRSI are combined.
Incorporation
When a farm business transfers into a company, different rules apply to stock and fixed assets. This includes trading stock, including livestock, transfers at tax cost, not at open market value. An election can be made so that stock moves into the company at its original cost.
Plant, machinery and equipment are acquired by the company at open market value. Capital allowances continue based on the existing written-down tax value, and where the incorporation is correctly structured, no immediate tax charge arises. Care is required as a balancing charge can arise where assets are transferred at values above their tax written-down value.
This difference typically creates a director’s loan account. The company owes the farmer the market value of the machinery and equipment transferred, and that loan can be repaid over time, tax-free, as the company generates cash. This provides a useful way of extracting value from the business in future years without triggering income tax.
Succession impact
Succession is where incorporation needs careful thought. In a traditional sole-trade farm, land and assets transfer directly from parent to child, with retirement relief for the transferor and agricultural relief for the successor.
A company changes the mechanics, but not necessarily the outcome. Agricultural Relief does not apply to company shares; instead, Business Relief applies.
Where land is transferred alongside control of the company, Retirement Relief can still apply for the parent, and Business Relief can apply for the child on the company shares.
One distinction is the farmhouse: Agricultural Relief can apply, whereas Business Relief cannot. Where land represents at least 80% of the total assets being transferred, this issue can often be managed without adverse consequences.
The key point is that incorporation does not prevent succession, but it does make it more technical. Early planning is essential.
If the company were to cease trading in the future, Retirement Relief and Entrepreneur Relief may still be available subject to meeting the relevant conditions at the time. Incorporation does not automatically close off favourable Capital Gains Tax outcomes later in life.
Think beyond this year’s bill
It’s very tempting to look at incorporation purely as a way to reduce this year’s tax bill. You need to think about where the business is heading over the next 10 to 20 years, how much cash you need and how the farm will pass to the next generation.
Marty Murphy, Head of Tax, ifac.
Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness.
I have heard that transferring my farm business into a limited company can help lower my tax bill, but I don’t know much about it or whether it applies to me. We have a farm in Kildare and are currently milking just under 120 cows.
The farm has been going well the past few years and we hope to expand. While we’re thankful to be doing well, we are looking at our potential tax bill this year and wondering if there is a way to minimise it. We’re currently set up as a sole trader, so is a limited company a good option? What would the consequences be for the business down the line?
ANSWER: Incorporation can be a very effective tool in the right circumstances, but it is not a silver bullet and it certainly doesn’t suit every farm.
At your scale – 120 cows, good profitability and expansion ambitions – incorporation is worth serious consideration. The key, however, is understanding why you are considering incorporation, rather than focusing solely on the tax bill for the current year.
Income averaging
As a sole trader, income averaging is usually the first line of defence. It works well where profits fluctuate, smoothing tax over good and bad years Income averaging does not reduce overall tax; it simply spreads it, and in falling profit cycles this can become a disadvantage.
If profits fall after several strong years, an averaging clawback can arise. One way to exit income averaging is to cease trading as a sole trader – for example, by incorporating.
The main attraction of incorporation is access to the 12.5% corporation tax rate on trading profits. This compares to a marginal personal tax rate that can exceed 55% once income tax, USC and PRSI are combined.
Incorporation
When a farm business transfers into a company, different rules apply to stock and fixed assets. This includes trading stock, including livestock, transfers at tax cost, not at open market value. An election can be made so that stock moves into the company at its original cost.
Plant, machinery and equipment are acquired by the company at open market value. Capital allowances continue based on the existing written-down tax value, and where the incorporation is correctly structured, no immediate tax charge arises. Care is required as a balancing charge can arise where assets are transferred at values above their tax written-down value.
This difference typically creates a director’s loan account. The company owes the farmer the market value of the machinery and equipment transferred, and that loan can be repaid over time, tax-free, as the company generates cash. This provides a useful way of extracting value from the business in future years without triggering income tax.
Succession impact
Succession is where incorporation needs careful thought. In a traditional sole-trade farm, land and assets transfer directly from parent to child, with retirement relief for the transferor and agricultural relief for the successor.
A company changes the mechanics, but not necessarily the outcome. Agricultural Relief does not apply to company shares; instead, Business Relief applies.
Where land is transferred alongside control of the company, Retirement Relief can still apply for the parent, and Business Relief can apply for the child on the company shares.
One distinction is the farmhouse: Agricultural Relief can apply, whereas Business Relief cannot. Where land represents at least 80% of the total assets being transferred, this issue can often be managed without adverse consequences.
The key point is that incorporation does not prevent succession, but it does make it more technical. Early planning is essential.
If the company were to cease trading in the future, Retirement Relief and Entrepreneur Relief may still be available subject to meeting the relevant conditions at the time. Incorporation does not automatically close off favourable Capital Gains Tax outcomes later in life.
Think beyond this year’s bill
It’s very tempting to look at incorporation purely as a way to reduce this year’s tax bill. You need to think about where the business is heading over the next 10 to 20 years, how much cash you need and how the farm will pass to the next generation.
Marty Murphy, Head of Tax, ifac.
Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness.
SHARING OPTIONS