Farm succession planning is often viewed as a complex process from a number of different perspectives.

Extensive research has been carried out investigating the barriers to farm succession.

This includes research carried out by Dr Shane Conway, University of Galway, which shows that a significant barrier to farm retirement is the anticipated loss of the recognition and social status that has accompanied being head of the farm.

However, a failure to address farm succession planning and make the necessary arrangements for the orderly and tax efficient transfer of assets/wealth can end up causing huge issues and witness the value of the transfer being eroded.

This warning was conveyed by Martin Clarke, partner and commercial manager at ifac, at last week’s Teagasc lowland sheep conferences held in Athlone and Donegal.

Martin outlined that succession planning covers both gifts and inheritances and has three core elements – legal effectiveness, tax efficiency and practicality (how it works on the ground). A common goal of succession planning is trying to avoid conflict in families while managing tax affairs.

Martin’s presentation covered a wide range of areas which are not possible to combine into one article.

As such, this article will aim to cover some of the important tips that should be considered.

Martin started out by advising that looking after oneself is important income wise and security wise. “One of the key things we always say to people is if you are transferring, will you have enough money without the income from the farm? People often say they can live comfortably on the pension but it is the forgotten expenses, the health insurance, changing a car that put finances under pressure and so that is something to consider.”

The question should be asked: is there income tax cessation implications while the income of the successor is a big factor? For example, sometimes the farm when operated by a mother and father is not liable for tax but when transferred to a daughter or son with a high-paying job, half the profits can disappear if paying tax at 52%. This can be addressed by how the farm is structured, eg company status.

The fair deal nursing scheme is a key consideration for elderly members who want to transfer assets out of their name before possibly facing unfortunate health challenges and going into a home.

The importance of having a will was also stressed on numerous occasions. Where no will is in place, then the Succession Act will dictate where the assets will fall (next of kin, family, etc). This can generate huge turmoil within families while tax planning can also be complex and sometimes not possible.

The making of a will can often frighten farmers, but Martin outlined that there is nothing stopping a will being changed and that this should not be the reason for not making a will.

An enduring power of attorney is also worth considering where there is a risk of farmers falling ill and not being in a position to manage their assets, as a will only becomes legally effective when a person passes away.

Removing complexity

Taking the complexity out of transfers will maximise the reliefs availed of, minimise the tax burden and help reduce the cost to the farm and retain the maximum value of assets.

Martin advises that protecting one’s own security can be complex with marital breakdowns one of the “things in life” that may occur.

Consideration of other family members is also a tricky consideration. One family member may receive an asset which has a significant value in the eyes of other people but may not be income generating.

He says that communication is key – it doesn’t work everywhere, but at least everyone knows what the ins and outs of what is decided.

Taxes liable

The key taxes in a farming scenario are capital gains tax (CGT), gift/inheritance tax (CAT), stamp duty and income tax.

In the case of a lifetime farm transfer, ie you decide to transfer the farm while you are alive, the taxes liable are CAT, CGT and stamp duty.

Tax relief for those classified as the favourite nephew/niece can also greatly reduce the tax payable on the transfer of an asset

When a person leaves their land under a will, Martin advises that CAT is all that applies – no CGT and no stamp duty apply.

There are various thresholds in place depending on if the farm is being transferred to a family member, person outside the family, etc. The current CAT rate (charged on the person receiving the property) is 33%, rising from 20% in 2009.

The current CAT tax-free threshold for transferring from a parent to a child is €335,000, again a significant reduction from €542,544, which was in place until December 2019.

Useful reliefs

There are useful reliefs which may be beneficial in reducing the tax liable. Reliefs highlighted include the small gifts exemption where €3,000 can be transferred annually, the important 90% agricultural relief and conditional gifts/inheritances which are useful if for example land is being purchased in the son or daughter’s name or passing down cash.

Business relief can reduce tax liability by 90% and again is an important relief. Tax relief for those classified as the favourite nephew/niece can also greatly reduce the tax payable on the transfer of an asset.

Planning is vital

The common recommendation across all agricultural reliefs is that planning is vital and can greatly influence the success of qualifying for the particular relief.

For example, in the case of the favourite nephew/niece, the tax threshold can be increased from class B (€32,500) to class A (€335,000) where it can be shown that the nephew/niece helped for five years previous for an average of 15 hours a week.

Martin says practices such as having your name included on merchant bills can help show that input was forthcoming.

Attendees at the conference were told that tax considerations should facilitate rather than drive succession plans.

Having a plan in your head of what one wishes to do with their assets is of no use unless it is documented and recorded. It is also never too early to get your affairs in order and in particular to make a will as no one knows what lies ahead.

The slides from Martin’s talk can be viewed online here.