Q “I have a large income tax bill this year and my accountant has suggested that I should farm through a company. What are the main issues that I should be looking at?”
A It is that time of year again when farmers facing large income tax bills are looking at incorporating their farming business to reduce tax.
So who should be looking at the limited company option?
Farmers who are currently paying a large portion of their income tax at the self-employed marginal rate of tax which can be as much as 55%. Farmers should look at their taxable income over the last three years in determining what their average taxable income is and look at their income projections over the next three years. Farmers in expansion mode. Money that is made by the farming company, after paying tax at 12.5%, will be retained within the company to fund expansion, e.g. purchasing additional land, expanding a milking parlour, etc. As tax within a company is payable at the rate of 12.5%, this means that for every euro earned by the company, 87.5 cent is available to repay loans.Compare this with repaying a loan as a sole trader whereby if you are paying tax at the marginal self-employed rate, as little as 45 cent in every euro is available to repay loans.
Who should not be looking at the Limited Company option?
Farmers who are paying tax at the lower rate: currently, 20%, i.e. a taxable income of €41,800 or lower for a married couple with one income or €65,600 for a married couple with two incomes.Farmers who have not availed of all tax saving measures for individuals such as payment of family wages, effective use of stock relief, etc.
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Farmers with young families with large levels of personal drawings. If a farming couple have young children, a large portion of their income will go towards paying for education, food, clothing, etc If the money that is used to pay for these items comes from the farming company, as opposed to a spouse’s off-farm income, it will suffer a ‘double tax’ hit.The taxable income can be subject to 12.5% within the company and as much as a further 55% when it comes from outside the company as it is treated as income in the hands of the farmer unless the farmer draws out the money as a salary/management charge which can be tax deductible against the farming company’s profits.
Farmers with significant ‘on-farm’ investments who have to suffer this ‘double tax’ hit to get money from the farming company out to themselves as individuals to pay back loans on these personal investments. However, there may be scope for restructuring loans so that loans become repayable by the company rather than the individual. While the interest rate on the company loan might not be as attractive as the personal loan, it might still work out better depending on the tax savings from company borrowings as opposed to personal borrowings.incorporation
At incorporation, land and buildings are generally not transferred into the company but are leased to the company. However, for farmers who are 55 years or over, they may transfer up to €750,000 into the company and claim Retirement Relief from Capital Gains Tax, thereby increasing the value of the director’s loan. The Milk Quota Regulations 2008 (as amended) provide that milk quota attaches to land used for milk production by a producer.
However, a way of transferring quota to the company without land is to lease the land together with quota attached to that land to the company (in which the producer has a majority shareholding) for a period of 12 months. The company can then buy the quota with or without purchasing the land at the end of the 12-month lease.
In terms of what value to put on the quota, it is generally advised to use the market clearing price of quota traded in the latest round of the Milk Quota Trading Scheme.
A director’s loan arises when a farmer transfers assets into the company so that the company owes him/her for those assets. This is set off against the value of any loans which the farmer transfers to the company.
Livestock and machinery can be transferred into a company at book value without triggering a tax charge. For example, livestock is valued at €200,000 and machinery at €75,000; a €275,000 loan from the farmer to the company is created.
Single Farm Payment entitlements can be transferred to increase the value of the director’s loan subject to ensuring that it does not trigger a VAT charge (currently €37,500) and the transfer is tax efficient from a CGT viewpoint.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, Agricultural Solicitors, does not accept responsibility for errors or omissions. E-mail ameehan@farmersjournal.ie.
Q “I have a large income tax bill this year and my accountant has suggested that I should farm through a company. What are the main issues that I should be looking at?”
A It is that time of year again when farmers facing large income tax bills are looking at incorporating their farming business to reduce tax.
So who should be looking at the limited company option?
Farmers who are currently paying a large portion of their income tax at the self-employed marginal rate of tax which can be as much as 55%. Farmers should look at their taxable income over the last three years in determining what their average taxable income is and look at their income projections over the next three years. Farmers in expansion mode. Money that is made by the farming company, after paying tax at 12.5%, will be retained within the company to fund expansion, e.g. purchasing additional land, expanding a milking parlour, etc. As tax within a company is payable at the rate of 12.5%, this means that for every euro earned by the company, 87.5 cent is available to repay loans.Compare this with repaying a loan as a sole trader whereby if you are paying tax at the marginal self-employed rate, as little as 45 cent in every euro is available to repay loans.
Who should not be looking at the Limited Company option?
Farmers who are paying tax at the lower rate: currently, 20%, i.e. a taxable income of €41,800 or lower for a married couple with one income or €65,600 for a married couple with two incomes.Farmers who have not availed of all tax saving measures for individuals such as payment of family wages, effective use of stock relief, etc.
||PIC2||
Farmers with young families with large levels of personal drawings. If a farming couple have young children, a large portion of their income will go towards paying for education, food, clothing, etc If the money that is used to pay for these items comes from the farming company, as opposed to a spouse’s off-farm income, it will suffer a ‘double tax’ hit.The taxable income can be subject to 12.5% within the company and as much as a further 55% when it comes from outside the company as it is treated as income in the hands of the farmer unless the farmer draws out the money as a salary/management charge which can be tax deductible against the farming company’s profits.
Farmers with significant ‘on-farm’ investments who have to suffer this ‘double tax’ hit to get money from the farming company out to themselves as individuals to pay back loans on these personal investments. However, there may be scope for restructuring loans so that loans become repayable by the company rather than the individual. While the interest rate on the company loan might not be as attractive as the personal loan, it might still work out better depending on the tax savings from company borrowings as opposed to personal borrowings.incorporation
At incorporation, land and buildings are generally not transferred into the company but are leased to the company. However, for farmers who are 55 years or over, they may transfer up to €750,000 into the company and claim Retirement Relief from Capital Gains Tax, thereby increasing the value of the director’s loan. The Milk Quota Regulations 2008 (as amended) provide that milk quota attaches to land used for milk production by a producer.
However, a way of transferring quota to the company without land is to lease the land together with quota attached to that land to the company (in which the producer has a majority shareholding) for a period of 12 months. The company can then buy the quota with or without purchasing the land at the end of the 12-month lease.
In terms of what value to put on the quota, it is generally advised to use the market clearing price of quota traded in the latest round of the Milk Quota Trading Scheme.
A director’s loan arises when a farmer transfers assets into the company so that the company owes him/her for those assets. This is set off against the value of any loans which the farmer transfers to the company.
Livestock and machinery can be transferred into a company at book value without triggering a tax charge. For example, livestock is valued at €200,000 and machinery at €75,000; a €275,000 loan from the farmer to the company is created.
Single Farm Payment entitlements can be transferred to increase the value of the director’s loan subject to ensuring that it does not trigger a VAT charge (currently €37,500) and the transfer is tax efficient from a CGT viewpoint.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, Agricultural Solicitors, does not accept responsibility for errors or omissions. E-mail ameehan@farmersjournal.ie.
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