There is increased interest from farmers in forming limited companies. In addressing discussion groups and farmers’ meetings on the topic of tax-planning, I am encountering farmers who have transferred their farming business to a limited company. I am finding many who would have been better advised to defer the decision.
Why defer the decision? Personal money is far better than company money because you have direct access to it. There are rules and regulations in relation to the extraction of money from a company and therefore the company option should only be considered when all available personal tax planning reliefs have been exhausted.
Examples of where the use of personal tax planning reliefs is not being explored:
Paying wages to a spouse - Where commercially justified it could remove up to €23,800 from the 41% tax band
Family wages - Again, where commercially justified, amounts of up to €8,250 per child or €16,500 in certain circumstances could be removed from the 52% rate band.
Capital expenditure - Farmers being asked about their future capital expenditure plans where the capital allowances could be tax deductible at 52% outside the company as opposed to 12.5% in the company.
Special farm reliefs - Tax planning reliefs not being exhausted eg:
Young Trained Farmers Stock Relief.Normal Stock Relief.Farm Partnership Stock Relief.Income Averaging.Farm Partnership.An opportunity may exist in some cases to reduce considerably the farm profits taxable at the 52% tax rate.
The planning point: Exhausting your personal tax allowances could allow you defer entering into a Limited Company structure.
Nasty tax surprise
Some farmers who incurred large capital expenditure under the Farm Waste Management Pollution Control Scheme have had the benefit of that expenditure being written off against their taxable profits over the past three years.
Example: Peter Farmer spent €90,000 net of grants in 2010 and claimed the special 33.3% allowance each year. His taxable profits were reduced as follows:
2010 tax year - €30,000 (accounts submitted October 2011).2011 tax year - €30,000 (accounts submitted October 2012).2012 tax year - €30,000 (accounts submitted October 2013).When the 2013 tax year accounts are to be submitted in October 2014, the €30,000 annual capital allowance claimed over the past three years will not now be available, resulting in a potential extra tax liability of up to €15,600.
Investigating the suitability of a limited company carrying on the farm enterprise should have started prior to 2013.
The planning point: Quantify the availability of capital allowances for off-set against current and future tax years.
Leased land
The continued availability of leased land to dairy farmers in close proximity to their home farms is crucial for commercial stability.
An unfortunate consequence of a limited company farming the leased land is that it may deprive the lessor of qualifying for the annual income tax exemption on the leasing of farm land.
Where a person aged 40 years or over, or who is permanently incapacitated by reasons of mental or physical infirmity, leases his/her farmland for a period of five years or more, some or all of that income may be exempt from income tax as follows:
For leases of five years and less than seven years, there is an annual exemption of €12,000 per annum.For leases of seven years and less than 10 years, the annual exemption is €15,000 per annum.For leases of 10 years and over, the annual exemption is €20,000 per annum.Under the normal Limited Company Farm Business structure, the income tax exemption is not available to the lessor. However, depending on the individual circumstances, with a modified structure, it may be possible to preserve the lessor’s entitlement to the income tax exemptions.
The planning point: When assessing the suitability of a limited company, examine the options available where land is being leased to you.
Increasing dairy incomes
Current indications of good milk price stability and a downward trend in feed prices should be monitored regarding their impact on 2014 profits and tax bills. While there is no guarantee of a continuation of these trends, an increased farm income combined with capital allowances running out could make the limited company option attractive for forthcoming years. It is very important that your annual meeting with your accountant regarding the submission of the previous year’s tax accounts should also include a discussion on the likely outcome of the current 2014 tax bill and the 2015 tax position.
The planning point: Use your annual meeting with your accountant to discuss tax planning for the current and future tax years.
There is increased interest from farmers in forming limited companies. In addressing discussion groups and farmers’ meetings on the topic of tax-planning, I am encountering farmers who have transferred their farming business to a limited company. I am finding many who would have been better advised to defer the decision.
Why defer the decision? Personal money is far better than company money because you have direct access to it. There are rules and regulations in relation to the extraction of money from a company and therefore the company option should only be considered when all available personal tax planning reliefs have been exhausted.
Examples of where the use of personal tax planning reliefs is not being explored:
Paying wages to a spouse - Where commercially justified it could remove up to €23,800 from the 41% tax band
Family wages - Again, where commercially justified, amounts of up to €8,250 per child or €16,500 in certain circumstances could be removed from the 52% rate band.
Capital expenditure - Farmers being asked about their future capital expenditure plans where the capital allowances could be tax deductible at 52% outside the company as opposed to 12.5% in the company.
Special farm reliefs - Tax planning reliefs not being exhausted eg:
Young Trained Farmers Stock Relief.Normal Stock Relief.Farm Partnership Stock Relief.Income Averaging.Farm Partnership.An opportunity may exist in some cases to reduce considerably the farm profits taxable at the 52% tax rate.
The planning point: Exhausting your personal tax allowances could allow you defer entering into a Limited Company structure.
Nasty tax surprise
Some farmers who incurred large capital expenditure under the Farm Waste Management Pollution Control Scheme have had the benefit of that expenditure being written off against their taxable profits over the past three years.
Example: Peter Farmer spent €90,000 net of grants in 2010 and claimed the special 33.3% allowance each year. His taxable profits were reduced as follows:
2010 tax year - €30,000 (accounts submitted October 2011).2011 tax year - €30,000 (accounts submitted October 2012).2012 tax year - €30,000 (accounts submitted October 2013).When the 2013 tax year accounts are to be submitted in October 2014, the €30,000 annual capital allowance claimed over the past three years will not now be available, resulting in a potential extra tax liability of up to €15,600.
Investigating the suitability of a limited company carrying on the farm enterprise should have started prior to 2013.
The planning point: Quantify the availability of capital allowances for off-set against current and future tax years.
Leased land
The continued availability of leased land to dairy farmers in close proximity to their home farms is crucial for commercial stability.
An unfortunate consequence of a limited company farming the leased land is that it may deprive the lessor of qualifying for the annual income tax exemption on the leasing of farm land.
Where a person aged 40 years or over, or who is permanently incapacitated by reasons of mental or physical infirmity, leases his/her farmland for a period of five years or more, some or all of that income may be exempt from income tax as follows:
For leases of five years and less than seven years, there is an annual exemption of €12,000 per annum.For leases of seven years and less than 10 years, the annual exemption is €15,000 per annum.For leases of 10 years and over, the annual exemption is €20,000 per annum.Under the normal Limited Company Farm Business structure, the income tax exemption is not available to the lessor. However, depending on the individual circumstances, with a modified structure, it may be possible to preserve the lessor’s entitlement to the income tax exemptions.
The planning point: When assessing the suitability of a limited company, examine the options available where land is being leased to you.
Increasing dairy incomes
Current indications of good milk price stability and a downward trend in feed prices should be monitored regarding their impact on 2014 profits and tax bills. While there is no guarantee of a continuation of these trends, an increased farm income combined with capital allowances running out could make the limited company option attractive for forthcoming years. It is very important that your annual meeting with your accountant regarding the submission of the previous year’s tax accounts should also include a discussion on the likely outcome of the current 2014 tax bill and the 2015 tax position.
The planning point: Use your annual meeting with your accountant to discuss tax planning for the current and future tax years.
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