Looking at the farm’s future can be a topic that many farming families feel uncomfortable talking about. Having no plan in place for the future can directly affect future growth prospects and profitability of the farm.

With recent changes and drivers in the Irish agriculture industry along with the huge financial and capital investments farmers have undertaken, it is critically important that all farmers take the time to carefully examine their succession plans.

All aspects of succession planning should be analysed, including the family home, dependent siblings, pensions and retirement planning. Culturally, Irish farmers have not been great at planning and often times the farm finances and all-important farming decisions are still dictated by grandfathers.

This creates a number of problems for the young and often qualified farmers but also it acts as an inefficiency for the farm as a whole and limits new growth opportunities. Having no succession plan in place can result in undefined roles and responsibilities on the farm and in turn can cause emotional grief and conflict between the current-generation farmer and the future farmer.

It also acts as a disincentive for the young farmer to take an interest in pursuing a life on the farm. The key challenge for farmers is to get them to think about the future, whether its five or 10 years ahead.

It is important that the farmer and their future successor discuss their individual future plans, goals and ambitions for the farm. Farmers may find it hard to discuss future farming decisions but by having an open dialogue and creating a farm strategy it helps to eliminate levels of future uncertainty and worry. Planning can be mentally and emotionally tough so farmers can seek advice from professionals to assist with the succession planning.

Personal story

Offaly native Liz contacted the Irish Farmers Journal for advice regarded succession planning for her family farm. I spoke to Declan McEvoy, IFAC, to get his insight on the matter.

“I’m an only girl, Liz (30), a qualified physio and working full-time in Portlaoise. My father (80) and mother (65) are living on the home farm in Offaly. My father is in poor health and is looking to the future of the farm for my mother and me. I don’t know the first thing about farming as I never took an interest in it but it means everything to my father. There are 100 acres in the one block but little or no buildings. While income from the farm is small now (a few cattle only) there is a €25,000 per year basic payment attached to the farm and my dad doesn’t want to lease it out yet even though most of it is cut for hay and silage only. It’s hard to start talking about the future with Dad because he is in bad health and he knows while I’m not averse to farming I’m probably never going to be full-time farming. How can we start the conversation? What do I need to do and what should be next steps to planning for the future?”

Planning for the future

Starting the conversation about the future of the farm can be tough but it is important to note that those plans are in place to benefit both Liz and her parents. The first aspect of any succession planning process, Declan advises, is to ensure that the needs of all parties are catered for. A plan needs to be put in place for the parents’ future to ensure their income, healthcare and living requirements are met. The parents may be dependent upon the income generated by the farm now, so a plan needs to be put in place to ensure that the parents will have enough income to satisfy their weekly needs.

After planning for the future of the parents, it is important for Liz to know exactly what she is inheriting.

Liz and her parents should plan exactly what assets and entitlements will be transferred to Liz. It is important for Liz to understand the true value of her inheritance. She should be made aware of any outstanding loans, lease agreements or any financial charges on the assets of the farm.

Having attained an understanding about what exactly Liz will be inheriting, the next important milestone in the succession planning process is to identify whether or not Liz will inherit the farm by a lifetime transfer or by a transfer on death. A lifetime transfer would involve her father transferring the farm to Liz during his lifetime whereas a transfer on death will result in Liz receiving the land upon the death of her father. Both transfer methods will have significant implications for Liz in terms of tax.

Declan advises that for Liz, a transfer by death would be more beneficial and would only result in inheritance tax and income tax implications.

Tax planning

The transferring of a 100-acre farm can have a substantial effect on a person’s income and in turn will have tax consequences for Liz. The main taxes which will directly affect Liz are stamp duty, Capital Acquisition Tax (CAT) and income tax.

Stamp duty

Currently Liz does not have an approved agricultural qualification. She will therefore be subject to stamp duty at a rate of 2% on the value of the farm. This could act as a significant cost to Liz when she inherits the farm.

Placing a value of €1m on her 100-acre farm could leave Liz with a €20,000 stamp duty bill. However, if Liz decides to train and get an approved farming qualification (Green Certificate) before she reaches the age 35, she would no longer be eligible to pay stamp duty on the farm.

Capital Acquisition Tax

Depending on the method by which the farm is transferred, Liz would have to pay gift/inheritance tax at a rate of 33% on the value of the farm above the threshold of $280,000. Therefore, if Liz did not benefit from any reliefs she would end up with a substantial tax liability.

Fortunately there are reliefs available for Liz to minimise the value of her farm which would mean she would effectively be paying no gift/inheritance tax. The main relief that would be of interest to Liz is agriculture relief.

Agriculture relief

In order for Liz to qualify for agricultural relief, the value of the inheritance must be represented by 80% agriculture assets. In addition, she must satisfy the active farmer test. For Liz to meet this requirement, she must comply with one of the following options:

1. Farm herself part- or full-time.

2. Obtain an agriculture/farming qualification and farm the land either full- or part-time.

3. Lease the land for a period of six years to an active farmer.

Assuming that Liz has no desire to continue farming the land, her only option would be lease the farm to an active farmer in order to qualify for agriculture relief and eliminate any potential tax liability. Qualifying for this relief is of utmost importance to Liz as it would effectively minimise or eliminate any tax liability with regards to Capital Acquisition Tax.

Income tax

Inheriting the family farm and all the entitlements that come with it will have direct implications on Liz’s income tax liability. Immediately, Liz’s yearly income will increase by €25,000, this being the value of the Single Farm Payment. Combined with her physio salary, it will push Liz’s income into the higher tax rate bracket and she will end up paying a substantial income tax bill.

Assuming Liz will be leasing out the entire farm, she will not be taxed on any income accruing from the leased land. However, as a result of CAP reform 2019, Liz will stand to lose the Single Farm Payment as she would not be actively farming the land. The loss of this entitlement will be a significant loss to Liz’s overall inheritance.

Capital Gains Tax

Capital Gains Tax will only affect Liz’s father. However, since Liz’s father has been farming the land for the past 10 years he will not incur any Capital Gains Tax liability. If Liz decides to sell the farm after inheriting it, she would pay Capital Gains Tax on the proceeds of the sale. Currently the Capital Gains Tax rate is 33%.

Other important factors to note

Liz mentioned in her letter that her father is experiencing bad health. It is important that the family plans for any unexpected medical cost which may arise in the future. It would be worth noting that if Liz’s father requires the assistance of a nursing home and a lifetime transfer did not take place, then the fair deal nursing home scheme may apply.

The fair deal nursing home scheme can take 5% per year of the value of the farm to compensate for the expenses of the nursing home. Over a number of years, this can significantly reduce the value of Liz’s inheritance. If the father transfers the land now to Liz and does not require the services of a nursing home for the next five years then no charge will be levied upon the farm.

Who can help?

Most commonly the first stage for many farmers when it comes to succession planning is to contact the family solicitor and draw up a will. However, before that, a number of financial and agricultural matters relating to the farm will have to be looked at before a will can be correctly drafted. To understand all implications, farmers may require assistance from agricultural advisers and accountants who specialise in agriculture-related matters. Remember that making a succession plan is just a comprehensive plan and is not written in stone.

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