Succession is the one topic that always garners a lot of attention at farming events. Even if your income is low, your land and farm assets are valuable and without proper planning, transferring them to your successors can incur substantial tax costs. That said, valuable reliefs are available which could enable you to transfer assets to family members tax free if you plan ahead and structure the transaction correctly.
When thinking about succession, factors to consider include:
Your future income. This should be the starting point when planning. Remember you are the person who built up the asset, you own the asset and you must look after your own security and that of your spouse. While this may seem selfish, you have to look after yourself before you divest you assets.Income tax implications of exiting the business or altering the farm structure.VAT that may be incurred as a result of the transfer.The potential Capital Gains Tax (CGT) liability you might incur on the transfer of the farm, The potential Capital Acquisitions Tax (CAT) that your successor may be liable for whether the transfer happens during your lifetime (lifetime transfer) or after your death (inheritance).Stamp duty that your successor may be liable for.
Income
Here, you need to look at your own circumstances and those of your successor. If you are aged over 65 and the only income that you will have after transferring your assets is the old-age pension, you may be able to earn additional income at nil tax, or at the lower rate of income tax. Therefore, it is worth examining the income tax structure of the business to take advantage of potential tax band savings or tax credits. This might also be a attractive option if you want to remain involved either as a partner or an employee.
VAT
If you are registered for VAT you can claim transfer of business relief. If you are not VAT-registered, you will need to ensure you do not trigger clawbacks on any recently developed buildings, etc.
Banking
In addition, keep in mind that bank approval may be needed for any planned property transfers and loans may need to be refinanced. This is part of the legal process and is hugely important.
Capital Gains Tax is a 33% tax on the person disposing of the property. There are a number of reliefs available depending on whether the disposal is to a family member or to someone outside the family.
If certain conditions are met CGT at 10% may apply.
Family transfers
If you are aged under 66 and passing the farm to a family member, CGT relief is unlimited provided you satisfy the relevant conditions.
If you are aged over 66, CGT relief is limited to €3m, so the portion above this threshold will attract a CGT liability
A number of important conditions apply to these CGT family reliefs :
You must have owned the property for more than 10 years and/or In the case of leased land, for at least 10 years prior to it being leased it must have been owned by the individual claiming relief and used by him/her for the purposes of farming throughout that period You must dispose of the property to an individual The person receiving must hold it for six years.Non-family transfers
The rules are more complicated when it comes to transfers outside the family. If you are aged under 66, you can claim full relief when the market value at the time of disposal does not exceed €750,000 . If you are over 66, the threshold is reduced to €500,000.
As CGT reliefs interact with other reliefs, it is important to seek professional tax advice.
Capital Gains Tax applies to lifetime transfers. In some situations, it may be possible to avoid CGT by delaying a transfer until post death when no liability arises.
Capital Acquisitions Tax (CAT)
CAT (33%) is charged on the taxable value of gifts and inheritances. The taxable value is calculated as the market value of an asset less the CAT relief available. If the property qualifies for either agricultural relief or business relief, the taxable value is reduced by 90%. This means that for an agricultural property valued at €2m, the taxable value is 10% of €2m, ie €200,000. The difference between getting CAT relief and not getting it is a tax saving of circa €600,000.
To claim agricultural relief, you must qualify as a farmer. This means 80% of your assets must be in agricultural land, buildings, stock or machinery. If you have off-farm investments and borrowings, no allowance is made for the borrowing. The only borrowing that is allowed in full is the value of a mortgage on your principal private residence.
In addition, you must be an active farmer. To qualify as an active farmer you must have an agricultural qualification and spend more than 50% of your time farming or lease the land to an active farmer. As with all reliefs, clawback can apply if you fail to meet the relevant conditions. To avoid clawback of agricultural relief, you must hold the asset for six years or, if you dispose of it within this timeframe, you must replace it within 12 months.
Like agricultural relief, business relief also reduces the taxable value of a property acquired by way of gift or inheritance by 90%, subject to certain conditions. The property must qualify as a “relevant business property”, the business must have operated for a minimum period of time before the gift or inheritance and you must retain ownership for a period of time.
Other points to note in relation to CAT are that if you are giving a site to a child, it is important it comes as a gift from yourself as the gift of a site to a child is tax free. Transfers of Basic Payment Scheme (BPS) payment entitlements, whether by way of gift or inheritance, are liable to CAT like transfers of any other asset. Where transferred with the land, they will qualify for the various reliefs.
Stamp duty
Up to last year, young trained farmers did not need to worry unduly about stamp duty. However, Finance Act 2018 introduced a cumulative lifetime cap of €70,000 on the amount of tax relief that a young trained farmer can claim for stamp duty relief, stock relief and the succession farm partnerships tax credit. The cap applies to reliefs received since 1 July 2014.
In effect, this means that most young farmers had used their full €70,000 relief allocation by the start of this year. A young trained farmer is defined as a person under 35 years of age at the date of transfer, with an agricultural qualification.
Other important issues
Other important matters to attend to include updating your will and deciding what will happen to the farm dwelling house. Remember if the house goes with the land and you retain a right of residence, it qualifies as an agricultural asset, which means agricultural relief can be claimed. However, if you retain an exclusive right of residence, this could mean agricultural relief will not apply.
It is also advisable to seek advice on the Fair Deal/Nursing Home Loan scheme. Where farm families avail of this scheme, it can have a significant impact as 7.5% of the value of the farm must be set aside annually to fund nursing home fees. This potentially creates a huge contingent liability for an indefinite period of time.
As is always the case, there are solutions for everything if you plan ahead in time. Seeking appropriate legal and tax advice is the best way to make the right decisions for yourself and your successors.
Succession is the one topic that always garners a lot of attention at farming events. Even if your income is low, your land and farm assets are valuable and without proper planning, transferring them to your successors can incur substantial tax costs. That said, valuable reliefs are available which could enable you to transfer assets to family members tax free if you plan ahead and structure the transaction correctly.
When thinking about succession, factors to consider include:
Your future income. This should be the starting point when planning. Remember you are the person who built up the asset, you own the asset and you must look after your own security and that of your spouse. While this may seem selfish, you have to look after yourself before you divest you assets.Income tax implications of exiting the business or altering the farm structure.VAT that may be incurred as a result of the transfer.The potential Capital Gains Tax (CGT) liability you might incur on the transfer of the farm, The potential Capital Acquisitions Tax (CAT) that your successor may be liable for whether the transfer happens during your lifetime (lifetime transfer) or after your death (inheritance).Stamp duty that your successor may be liable for.
Income
Here, you need to look at your own circumstances and those of your successor. If you are aged over 65 and the only income that you will have after transferring your assets is the old-age pension, you may be able to earn additional income at nil tax, or at the lower rate of income tax. Therefore, it is worth examining the income tax structure of the business to take advantage of potential tax band savings or tax credits. This might also be a attractive option if you want to remain involved either as a partner or an employee.
VAT
If you are registered for VAT you can claim transfer of business relief. If you are not VAT-registered, you will need to ensure you do not trigger clawbacks on any recently developed buildings, etc.
Banking
In addition, keep in mind that bank approval may be needed for any planned property transfers and loans may need to be refinanced. This is part of the legal process and is hugely important.
Capital Gains Tax is a 33% tax on the person disposing of the property. There are a number of reliefs available depending on whether the disposal is to a family member or to someone outside the family.
If certain conditions are met CGT at 10% may apply.
Family transfers
If you are aged under 66 and passing the farm to a family member, CGT relief is unlimited provided you satisfy the relevant conditions.
If you are aged over 66, CGT relief is limited to €3m, so the portion above this threshold will attract a CGT liability
A number of important conditions apply to these CGT family reliefs :
You must have owned the property for more than 10 years and/or In the case of leased land, for at least 10 years prior to it being leased it must have been owned by the individual claiming relief and used by him/her for the purposes of farming throughout that period You must dispose of the property to an individual The person receiving must hold it for six years.Non-family transfers
The rules are more complicated when it comes to transfers outside the family. If you are aged under 66, you can claim full relief when the market value at the time of disposal does not exceed €750,000 . If you are over 66, the threshold is reduced to €500,000.
As CGT reliefs interact with other reliefs, it is important to seek professional tax advice.
Capital Gains Tax applies to lifetime transfers. In some situations, it may be possible to avoid CGT by delaying a transfer until post death when no liability arises.
Capital Acquisitions Tax (CAT)
CAT (33%) is charged on the taxable value of gifts and inheritances. The taxable value is calculated as the market value of an asset less the CAT relief available. If the property qualifies for either agricultural relief or business relief, the taxable value is reduced by 90%. This means that for an agricultural property valued at €2m, the taxable value is 10% of €2m, ie €200,000. The difference between getting CAT relief and not getting it is a tax saving of circa €600,000.
To claim agricultural relief, you must qualify as a farmer. This means 80% of your assets must be in agricultural land, buildings, stock or machinery. If you have off-farm investments and borrowings, no allowance is made for the borrowing. The only borrowing that is allowed in full is the value of a mortgage on your principal private residence.
In addition, you must be an active farmer. To qualify as an active farmer you must have an agricultural qualification and spend more than 50% of your time farming or lease the land to an active farmer. As with all reliefs, clawback can apply if you fail to meet the relevant conditions. To avoid clawback of agricultural relief, you must hold the asset for six years or, if you dispose of it within this timeframe, you must replace it within 12 months.
Like agricultural relief, business relief also reduces the taxable value of a property acquired by way of gift or inheritance by 90%, subject to certain conditions. The property must qualify as a “relevant business property”, the business must have operated for a minimum period of time before the gift or inheritance and you must retain ownership for a period of time.
Other points to note in relation to CAT are that if you are giving a site to a child, it is important it comes as a gift from yourself as the gift of a site to a child is tax free. Transfers of Basic Payment Scheme (BPS) payment entitlements, whether by way of gift or inheritance, are liable to CAT like transfers of any other asset. Where transferred with the land, they will qualify for the various reliefs.
Stamp duty
Up to last year, young trained farmers did not need to worry unduly about stamp duty. However, Finance Act 2018 introduced a cumulative lifetime cap of €70,000 on the amount of tax relief that a young trained farmer can claim for stamp duty relief, stock relief and the succession farm partnerships tax credit. The cap applies to reliefs received since 1 July 2014.
In effect, this means that most young farmers had used their full €70,000 relief allocation by the start of this year. A young trained farmer is defined as a person under 35 years of age at the date of transfer, with an agricultural qualification.
Other important issues
Other important matters to attend to include updating your will and deciding what will happen to the farm dwelling house. Remember if the house goes with the land and you retain a right of residence, it qualifies as an agricultural asset, which means agricultural relief can be claimed. However, if you retain an exclusive right of residence, this could mean agricultural relief will not apply.
It is also advisable to seek advice on the Fair Deal/Nursing Home Loan scheme. Where farm families avail of this scheme, it can have a significant impact as 7.5% of the value of the farm must be set aside annually to fund nursing home fees. This potentially creates a huge contingent liability for an indefinite period of time.
As is always the case, there are solutions for everything if you plan ahead in time. Seeking appropriate legal and tax advice is the best way to make the right decisions for yourself and your successors.
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