Before deciding to purchase land, it’s important to understand the business and tax implications, explains Declan McEvoy.
From time to time you may encounter situations where you want to acquire an additional parcel of land. It could be that you are expanding your business or have a chance to purchase land you are currently leasing or it might be just be that an adjacent field is for sale, and buying it would improve access to your farm. Whatever the reason, if you decide to go ahead with the purchase you will need finance to fund the transaction.
When it comes to working out where to find the finance, the first step is to review your current position and work out if the proposed purchase makes sense. Ask your accountant to explain your options taking into account any tax implications as these can vary depending on how you fund the proposed acquisition.
7 Questions to Consider When Deciding to Purchase Land
When you meet your accountant, seven key questions to discuss include:
What is the reason for the proposed purchase?
What, if any, funds are available from your existing resources to fund the proposed purchase?
Do you intend to sell any assets or land to finance the purchase and, if yes, is this advisable from a business and tax perspective?
How has your business performed over the last four years? What profit did you generate? What is your projected future profit for the next four years?
Will you need to borrow to fund the purchase and, if yes, what is your repayment capacity?
Would changing your business structure be beneficial?
What stamp duty considerations need to be taken into account?
Let’s say that the reason for your proposed purchase is that some land has come up for sale adjacent to your property. You want to buy this land to improve access to your farm and expand your business.
While you do not have cash on deposit in the bank that you can use to fund the purchase, you have some Co-op shares that you intend to sell which will partly offset the cost. From a tax perspective, you will need to take into account when and how you acquired these shares as this will affect the Capital Gains Tax that may be due when you sell them. For example, if you purchased the shares, you could be liable for 33% CGT on any gains that you make unless you have prior losses that could help to reduce your CGT liability. If you acquired the shares by way of a gift or inheritance, your CGT liability might be lower.
In addition to selling your Co-Op shares, you may be thinking about disposing of another parcel of land to fund the purchase of the new holding. Tax again needs to be considered bearing in mind that if you qualify for certain reliefs, they could reduce or eliminate your CGT liability. For example, if you are disposing of land to make your farm more efficient you might qualify for Farm Restructuring Relief. If you are aged 55 or older and disposing of qualifying business or farming assets, you may be able to claim Retirement Relief depending who you are disposing of the assets to. If you don’t qualify for either of these reliefs, you might be able to claim Entrepreneur Relief which reduces the CGT rate from 33% to 10%.
If your available resources are not sufficient to fund the purchase, you will need to borrow. In this situation, the lender is likely to want to review your profits over the last few years and will want to see your projected future profits. Your accountant will help you work out your loan repayment capacity, taking into account your existing debts, drawings, tax liability and capital investment requirements. Keep in mind that the cost of servicing your loan will have to be met out of after tax earnings. This means that if you are a sole trader, you will need about €20k in taxable earnings to service the principal on every €10k that you borrow.
Business structure is an important question to raise when you meet your accountant. This is because if you need to borrow to fund a land purchase, it is sometimes beneficial to structure your business as a limited company. Depending on your current after tax earnings, changing from sole trader status to a limited company status can reduce your tax liability which, in turn, may improve your ability to secure loan approval.
Finally, Stamp Duty needs to be considered. Here, the standard rate is 6% but certain reliefs may be available — for example, Farm Consolidation Relief reduces the stamp duty to 1% on transactions that qualify for a farm restructuring certificate and satisfy certain other conditions. Transfers of land to young trained farmers may also qualify for Stamp Duty relief however bear in mind that cumulative lifetime cap of €70,000 applies to the amount of relief that a young trained farmer can claim for stamp duty relief, stock relief and the succession farm partnerships tax credit.
While this short article highlights some of the key questions to consider when contemplating buying land, individual circumstances vary so, as always, it is advisable to seek appropriate advice by contacting your local ifac office in the first instance.