There can be a lot of confusion among farmers when it comes to succession planning.
Bar stool talk, fear of tax, concerns about the viability of the farm, lack of a willing successor, worries about income for the older generation, fear of the potential impact of marital breakdown — all of these factors tend to delay succession planning. However, the earlier you clarify your intentions, the better you will be able to plan for the successful transfer of your business.
Key issues to consider include:
• Whether there is a successor, and if so, whether that person is a family member or another person who is willing to take on the business. If you have a successor in mind, and you know that they are willing, now is the time to think about preparing them for their future role. One way to encourage their involvement could be to enter into a Succession Registered Farm Partnership which provides an incentive in the form of an Income Tax credit of €5,000 for up to five years, allocated on a profit sharing ratio between a qualifying farmer and his/her successor.
• Whether you wish to continue to be involved in the farm after you transfer the business, and if so, in what capacity?
• Your future income. You must look after your own security and that of your spouse before you divest your assets.
• Farm dwelling house. If the house is transferred 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.
• Fair Deal Nursing Home Scheme. Under this scheme, 7.5% of the value of the farm must be set aside annually to fund nursing home fees. There is a three-year cap on contributions taken by the State to fund care costs provided that a family successor continues to operate the farm or business for six years.
• Income Tax implications of exiting the business or altering the farm structure.
• VAT that may be incurred when transferring your business.
Succession Planning tax considerations
In addition to the issues outlined above, the three main taxes to consider when succession planning are Capital Acquisitions Tax (CAT), Capital Gains Tax (CGT) and Stamp Duty.
Capital Acquisitions Tax
The person who inherits or receives your farm by way of gift or inheritance will be liable for Capital Acquisitions Tax (33%) on the value of the gift above a certain threshold. However, if the property qualifies for either Agricultural Relief or Business Relief the taxable value of the gift/inheritance is reduced by 90%. For parent to child transfers, the CAT threshold is €335,000. A nephew or niece who has worked full-time on your farm may qualify as your ‘child’ for CAT purposes.
Capital Gains Tax
CGT is payable on any gains you make when you dispose of an asset however 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 over 66, the relief is restricted to €3m. If you are transferring the farm to another person, and you are aged under 66, you can claim full relief when the market value at the time of disposal does not exceed €750,000. The threshold is reduced to €500,000 if you are over 66. Should you decide to sell your farm as you approach retirement, Retirement Relief could potentially eliminate your CGT liability subject to satisfying the relevant conditions while Entrepreneur Relief reduces the CGT rate to 10%.
Stamp Duty is incurred when property is transferred. The rate depends on the type of property and the value. Transfers between spouses, are exempt. Available Stamp Duty reliefs include Consanguinity Relief which reduces the rate on qualifying assets from 6% to 1% on transfers up to 31 December 2020, consolidation relief which allows for a 1% rate of Stamp Duty on transactions up to 31 December 2020 that qualify for a ‘Farm Restructuring Certificate’, and Young Trained Farmer Relief which affords full relief on transfers up to 31 December 2021 once the relevant conditions are met. Note, however, that there is 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.
It is very important to make a Will as otherwise the law will determine where your assets fall and that this may not be in line with your wishes. Your Will and Succession Plan should both be reviewed and updated from time to time to ensure they continue to reflect your wishes.
Stamp Duty 1%
Capital Acquisitions Tax 33%
Capital Gains Tax 10%
For more information and/or advice, contact your local ifac office.
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