Farming & Succession within the family– what are the current tax & Legal considerations?
Modern farming is a business, and like any business, it must take advantages where they arise. The world of farming has changed dramatically over the last number of decades. It has gone from a straightforward outdoor profession to a complicated, rules orientated business. Farmers nowadays spend as much time indoors with paperwork as they do outside actually working.
We also understand how difficult it can be to plan for the future. The advantages to doing so are obvious, but one needs to be aware of the potential pitfalls and the ramifications of decisions both from an accountancy and a legal perspective.
The types of queries therefore should concentrate on anticipated or potential difficulties. Farmers should initially try to establish whether or not the contemplated plan is tax efficient and can practically work. Thereafter they should seek to ascertain and understand all of the benefits and drawbacks of what is planned. Ultimately the farmer’s main query should be to find out the “good, the bad and the ugly” of what is planned. From there they can make an informed decision.
Some of the main issues facing farmers usually relate to ownership of the farmlands. Farms are of not only of a monetary value, but they also hold a huge sentimental value which may have built up in some cases over many generations. This makes it very hard to let go. Succession and the transfer of farming land is an issue faced by successive generations of farming families. The aim is to effect the transfers of farms from one family member to the next while minimising the associated tax cost.
In our experience the two main issues facing farmers on transfers of land are:
- Firstly the practical issue of what they are going to do. Do they keep farming or transfer to the next generation, or indeed sell?.
- Secondly is the question of tax. Can they afford to transfer to the next generation? What costs arise as a result of such a transfer?
The tax reliefs which have existed over the last numbers of years in Ireland still remain but changes to some of these cannot be ruled out in the upcoming budget. Also, tax free gift/inheritance thresholds have fallen considerably and capital tax rates on taxable farm transfers have increased from 20% to 33% (and may keep climbing). Such trends will continue driving up the cost associated with family farm transfers.
Some additional tax incentives for farming land exchanges have been introduced recently which may be beneficial to some in the farming community.
Taxes arising on the transfer of qualifying faming land within the family must be considered under the following tax heads:
Capital Gains Tax(CGT) for the transferor ( the parent) : Despite the parent not receiving any payment from the child, under the tax legislation, the parent is deemed to have received consideration equal to the market value of the farm assets transferring during their lifetime. The parent may then have a liability to capital gains tax (currently 33%) on any increase in value of the farming assets since the assets vested in their name.
A relief from CGT called retirement relief may be available on the transfer of qualifying farm assets if the parent satisfies certain conditions; including being over 55 years of age and the land having been farmed for the last 10 years. This relief exempts the parent from CGT on the farm transfer. Currently, there is no limit to this relief on transfers between parent and child but from 31 December 2013, for any farmer over 66 years of age, the CGT relief will be limited to farming transfers of €3m and any amounts in excess of this will be liable to CGT.
In the case of assets transferring on a death, no CGT arises for the parent and this can be one of the main reasons why some farms are not transferred during the parent’s lifetime. Nonetheless, the impact on the child and the timing of the transfers must also be considered.
- Inheritance/Gift Tax(CAT) for the transferee ( the child): On receipt of a tax free gift from a parent, if the value of the gift exceeds the tax free group A threshold, currently €225,000, CAT at 33% is due and payable by the child. The value of the gift is deemed to be the market value of the farming assets transferring. A relief from CAT called agricultural relief (and if agricultural relief does not apply in some cases business relief may apply) may be available on the transfer of qualifying farming assets situated anywhere in the EU. This relief has the effect of reducing the taxable value by 90%.
For example: the transfer of a qualifying farm worth €2.25m on which agricultural relief can be fully claimed, the taxable value would be reduced to €225,000. Assuming the Group A parent to child tax free threshold was still available then no CAT would be due on this transfer.
In order to qualify for agricultural relief the child, on the valuation date, must be considered to be a farmer. A farmer for CAT purposes means that 80% of the market value their assets, including the farm assets just gifted, must consist of qualifying farming assets. Also, for agricultural relief purposes the agricultural assets cannot be sold by the child for a 6 year period to avoid any clawback.
- 3. Stamp Duty: Stamp duty on the transfer of commercial property (including Farm land) is 2% of the market value of the property transferring. However, on the transfer of assets, other than shares, between parent and child a relief called consanguinity relief is available to reduce the stamp duty rate to 1%. This relief is due to expire in December 2014.
The transfer of lands to persons who qualify as young trained farmers is exempt from stamp duty. This relief is available until the end of 2015 for those qualifying as Young Trained Farmers. The person who is gifted the land is liable to pay the stamp duty liability.
- VAT on the transfer of assets must also be considered depending on the VAT status of the parties.
In light of the Harvest 2020 Report and the reform of CAP, tax legislation has recently been introduced to assist farmers in restructuring their land holdings. Relief from CGT is provided where a farmer sells land and reinvests the proceeds in new land within a 24 month period. It applies to land deals between 1 January 2013 and 31 December 2015. It also applies to land swaps certified by Teagasc. If the full amount of proceeds from sale of the land is not re-invested into new lands then there could be partial liability to CGT on the element not reinvested. Stamp duty relief may also be available to certain qualifying farmers on the exchange of lands under farm consolidation relief. This relief could be of considerable benefit to farmers who are trying to restructure their land holdings for operational and efficiency reasons.
The fastest and best way for a farmer on the brink of retirement or transfer to make a decision is for him or her to take appropriate legal and accountant advice. The main questions to be raised are:
- 1. Timing: Should I transfer the lands now, or should I retain ownership and pass the lands under my will?.
- 2. Entitlements: Will the entitlements be affected by my actions?. How can I ensure that they are protected and go to the person I intend? Can I transfer the land and keep the entitlements?
- 3. Tax Consequences: What are the tax consequences?
- 4. Tax Reliefs: Are there any tax reliefs available to me, or to the person inheriting/ receiving the farm?
- 5. The future. How will I survive if I transfer the farm source income now?
- 6. The unknown. What if I transfer the land to my son or daughter and their marriage breaks down?. Can this be protected?
Whether you are seriously thinking about retirement or it’s just an idea popping up now and again, it is essential to be informed. As with all transactions, certain basic pitfalls must be avoided: These include, but of course are not limited to the following:
- Failure to seek the correct advices: Solicitors and accountants are there to provide the exact information required to prepare and complete a land transfer or a will. We would always strongly advise any client’s against preparing and completing their own will, as this can lead to catastrophic mistakes, which have the effect of invalidating the will. In the case of transfers and retirement, some people fail to engage in the process at all because of “stories” that they have heard. You should always seek the facts from someone qualified to give them.
- Timing: In the case of succession it is vitally important to prepare your will as soon as possible. A will can be changed many times and is not in any way binding until after your death. It must always be kept current to reflect your wishes. In relation to transfers, the main concerns are deadlines associated with Budget changes.
- Failing to speak with financial institutions in advance in circumstances where there may be term loans or mortgages over the lands. The lending institution must be agreeable to the transfer of the lands and agreeable to set up new finances to reflect the change in ownership and responsibility. Failure to seek the consent of the bank can delay the transfer going through. This has historically been a problem where people are under pressure to have the transfer done before the annual budget for example.
- Maintenance / support. The Famer who is transferring /retiring may not have considered their own position. For example, how they will get by once they have transferred their only source of income.
As with any transaction, the receipt/inheritance of a farm is a major step in anyone’s life. It can sometimes be an overwhelming experience at first. We can assist the young farmers during the process by providing them with all the information they need in relation to Gifts or inheritance of land. For example, there are two very important reliefs available to young farmers obtaining lands:
1. Young Trained Farmer relief (Gifts only): This is contained under Section 81AA of the Stamp Duties Consolidation Act 1999. This is a full relief from stamp duty applicable on the transfer of lands from a farmer to a ‘Young Trained Farmer’. To qualify for this relief The farmer must be less than 35 years of age on the date of execution of the deed of transfer and must also have attained one of the necessary qualifications. The Young Trained Farmer must also, for a period of five years from the date of execution of the deed of transfer spend not less than 50% of his/her normal working time farming the land, and retain ownership of the land,
2. Agricultural relief (Gift/ Inheritance): This relief operates by reducing the market value of ‘agricultural property’ by 90%, so that gift or inheritance tax is calculated on an amount – known as the ‘agricultural value’ – which is 10% of the market value. This substantially reduces potential Capital Acquisitions Tax liabilities. There is a very strict definition of both ‘Agricultural property’ and ‘Farmer’ applied under this relief.
While tax rates have increased and tax free thresholds have reduced, the favourable reliefs detailed above are still currently available. There may be changes made in the upcoming October Budget and farmers should consider if farming asset transfers should be executed in advance of this to capitalise on the current tax regime.
William Clarke is a partner in Clarke Jeffers & Co solicitors, and specialises in agricultural acquisition and transfers. He can be contacted on 059 91 31656 or via e mail at email@example.com (www.carlowsolicitors.com)
Sasha Kerins is a tax director with Grant Thornton working in both their Dublin and Newbridge offices. She has extensive experience advising on the tax aspects of agricultural related transactions and advising on succession. (www.grantthorton.ie)
©2013 William Clarke, Partner, Clarke Jeffers Solicitors
©2013 Sasha Kearns, Tax Director, Grant Thornton
The above commentary merely acts as a general overview of the types of tax issues to be considered when considering asset transfers. Independent professional advice should always be sought in advance of any intended transfers. Grant Thornton and/or Clarke Jeffers & Co take no responsibility for anyliability for any loss occasioned to any person acting or refraining from acting as a result of the above information.