Lowering your income tax bill
Irish farmers should be aware that there are a significant number of steps they can take in order to lower their annual income tax bill.
1 Tax credits
Ensure that you are availing of all the credits you are entitled to. These reduce the amount of tax that would otherwise be payable. Table 1 gives details of the main personal tax credits for the tax years 2020 and 2021.
2 Local property tax
Ensure that you have paid your local property tax so that you do not incur a surcharge on your income tax liability.
3 Medical expenses
Tax relief is available on non-recoverable medical expenses incurred by the taxpayer, spouse and children. Certain items are not allowed. This relief is confined to the 20% rate. You can only claim for expenses that you have receipts for. You can claim relief on the last four years’ health expenses.
4 Tax deductions for motor/web/telephone etc.
If you spend money on something that is for both business and private use, you can claim a deduction for part of the expense. This includes items such as phone bills and motor expenses.
Review the amount you add back for personal use.
5 Family wages
Is your family working on the farm? Where a family member is employed full-time on the farm, they are entitled to the employee tax credit. They can only claim this if they earn a sufficient farm wage that incurs a tax liability.
For 2020/2021, this tax credit is €1,650 plus the earned income credit of €1650. Therefore, if a single person is an employee with no other earnings, they can earn up to €16,500 before incurring any tax. A child living at home can earn €13,000 with no tax, PRSI or USC.
The child must make a commercial contribution to the farm, must be registered as an employee and an annual employer return must be made.
6 Spousal earnings
If both partners are earning, ensure you are availing of the dual-income tax benefit. A dual-income couple can earn substantially more at the low rate than a single-income couple.
However, there may be situations where couples wish to be treated partially or separately for tax purposes. Make sure you choose the method which is best suited to you — joint assessment, separate assessment or single assessment.
Under joint assessment, the tax credits and standard cut-off points can be allocated between partners to suit. A married person with a non-earning spouse can earn a maximum of €44,300 at the 20% rate, whereas a couple in partnership can earn up to €70,600.
7 Paying a wage to your spouse
If you do not create a partnership with your spouse, it could be equally beneficial to pay your spouse a wage. This would extend the 20% tax band. Usually, farming spouses are involved in the running of the farm and can justify the wage.
8 Stock relief
Stock relief takes the form of a deduction from farming profits. There are currently three bands of stock relief available. In any accounting year, a farmer is allowed to reduce his/her trading stock by 25% of the increase in value against profits.
When it comes to disposing of this stock, there is no clawback position. He/she will only be taxed on the amount by which the sale proceeds exceed the actual value that had been placed on those stock for tax purposes. Stock relief is available at 50% for registered partnerships. There is also 100% relief for young trained farmers.
Budget 2019 extended all three stock reliefs for a further three years until the end of 2021.
Stock relief is very beneficial for farmers who are expanding as the relief is never clawed back. It is important to note that stock relief cannot be claimed to create or increase a loss.
Stock relief is available at 50% for registered farm partnerships subject to a cap of €15,000 over any three-year period.
There is also 100% stock relief for a young trained farmer for four years limited to a value of €40,000 in one year and €70,000 in aggregate over the four years. This €70,000 limit must also take into account any young trained farmer stamp duty relief claimed.
9 Income averaging
Review the use of income averaging. Is it still beneficial? If you opt out you must review the previous four years. You must stay off averaging for four or five years after opting out, so consider the effect of an increase in profits.
A one year opt out provision is available which taxes one on the actual versus the averaged profit.
10 Succession tax credit
This incentive takes 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. You must agree to enter into a registered farm partnership and then transfer to a registered succession partnership to avail of the credit.
11 Capital allowances
When farm machinery, tractors, cars, vans and farm buildings are purchased, they are not treated as deductible expenses in the normal way.
Instead, their cost is allowed over a number of years. For plant and machinery, it must be written off over eight years at 12.5% per year. Farm buildings and land improvement can be written off over seven years at a rate of 15% for the first six years and 10% in the seventh year.
Cars are given a capital allowance based on their emission category (if first registered on or after 1 July 2008). A car in emission categories A, B or C can avail of capital allowances of 12.5% per annum up to a cost of €24,000 – even if the car costs more. Cars in higher-emission categories have reduced allowances.
12 Liquid milk contract
The disposal of a liquid milk contract can be a mixture of income tax/CGT.
If a farmer has forestry, or is in a forestry partnership, all profits from this – including the premiums and timber sales – are not liable to income tax. However, they are liable to PRSI and USC. If a grant is received for planning, it is not liable for tax.
14 Energy-efficient equipment
This scheme aims to encourage farms to invest in energy-saving equipment. Farmers who use the scheme are allowed to write off 100% of the purchase value of qualifying energy-efficient equipment against profit in the year of purchase.
The equipment must meet the specified energy criteria and be designed to achieve high levels of energy efficiency. This includes electric motors and drives, lighting equipment and systems, building energy management systems, electric and alternative fuel vehicles, refrigerating and cooling equipment and systems, etc.
A full list of the qualifying equipment is available on the SEAI website.
15.Farm safety equipment
Introduced in the finance act 2020 is an enhanced capital allowance regime for investment in farm safety equipment. The expenditure can be written off over 2 years as against the normal 8 years.
16 Land leasing
If a farmer (of any age) decides to lease his/her land for five years or more, some or all of that income may be exempt from income tax. If the lease is for 15 years or more, up to €40,000 can be earned tax-free every year. If it is for 10 years or more, but less than 15 years, up to €30,000 can be earned tax-free every year.
For seven years or more but less than 10 years, the tax-free threshold is €22,500 per annum; for five years or more, but less than seven years, it is €18,000 tax-free each year. If you have an older lease would a review and update of the lease be worthwhile to avail of the higher allowances?
A qualifying lessee cannot be the lessor’s immediate family (i.e. grandparents, parents, brothers, sisters, children and grandchildren), the spouse of the lessor or the immediate family of the spouse. There are some other limitations also. Nieces or nephews qualify as eligible lessees.
Where lands are jointly held (i.e. husband and wife) both parties can claim the exempted amount – i.e. up to €80,000 can be tax exempt every year.
17.Investing in personal pensions
Could making a pension contribution reduce your income tax liability? Contribution towards a personal pension are fully tax allowable, subject to certain limits. On maturity, your tax liability will depend on what you decide to do with your fund.
If you opt for a straightforward annuity (and assuming you take your 25% tax-free lump sum) you will be liable for income tax and USC at the normal rates on the balance of the fund.
A standard 30% tax applies on death on the transfer of value to your children.
18 Deed of covenant
A farmer, who may be a higher rate taxpayer, could save on his/her income tax bill by giving money to support a family member through a deed of covenant. To avail of this, the person to whom you give or covenant money must be 65 or over or be permanently incapacitated.
You can then claim tax relief on an amount of up to 5% of your total income. There is no limit if the person is permanently incapacitated.
19 Rent-a-room relief
Could you rent a room in your house and avail of tax-free income?
The rent-a-room relief entitles a homeowner to earn up to €14,000 rent in a year, which is not subject to any tax. The room must be rented out from the principal primary residence. A son or daughter cannot avail of this scheme.
20. Help to Buy scheme
The government’s July stimulus plan introduced a temporary increase in the tax reliefs available under the Help to Buy scheme. These increased level of reliefs will remain in place up to 31 December 2021.
Under the Help to Buy scheme, there is now Income Tax relief to the lesser of:
• €30,000 (up from €20,000)
• 10% (up from 5%) of the purchase price of the new home or of the completion value of the property in the case of self-builds.
• The amount of income tax and DIRT tax paid over the four years prior to making the application.
Important stamp duty reliefs
Stamp duty is a tax charged on the transfer of property. In general, the only factor affecting the amount of stamp duty charged is the value of the property/land. The transfer of livestock, machinery and basic payment entitlements are not subject to stamp duty.
The rate of stamp duty applicable to residential property is 1% on the first €1m, and 2% on the excess over €1m. Stamp duty on non-residential property is 7.5%.
21.Blood relative relief
Stamp duty relief has been enhanced so that any transfer of farm assets between blood relatives is subject to 1% stamp duty instead of the new 7.5%. Age restrictions on this relief have been removed. Other conditions still remain and should be reviewed before any transfers takes place. This runs until 31 December 2023 .
22. Young trained farmer relief
This exemption from stamp duty is to encourage the transfer of farmland to a new generation of farmers with relevant qualifications. The transfer may be by way of a gift or sale. It applies where the young trained farmer is under 35 at date of the transfer.
Young trained farmers must have the relevant agricultural qualifications or must acquire the qualifications within four years from the date of execution of the transfer instrument.
The young trained farmer must spend 50% of their time farming the land to qualify. A lifetime ceiling of €70,000 applies to the amount of State aid provided to young trained farmers under stock relief and the succession partnership credit.
The latest date on or before which transfers of land must be executed has been extended on a few occasions and, at the time of writing, is 31 December 2021 (CHECK).
Maximising VAT reliefs
Farmers and farming companies do not have to register for VAT, irrespective of turnover. Farmers are entitled to apply a flat-rate addition of VAT (5.4%) to their prices when supplying agricultural produce or services to VAT-registered customers.
Flat-rate farmers are also entitled to reclaim VAT on certain capital expenditure.
23.Capital expenditure VAT refund
Farmers who are not registered for VAT can get a refund on the VAT element of any invoices relating to capital expenditure, eg land improvement, yards, fencing, drainage or buildings and fixed equipment, such as milking parlours, scrapers, bulk tanks, etc (repairs are not covered).
You can claim VAT back on items purchased in the last four years. The application must be made online via a VAT 58 application form.
24.Flat-rate VAT refund
Ensure that you are being paid at the rate of 5.6% on all sales from 1 January 2021 if you are unregistered .
25. VAT on farm sale
If you are unregistered for VAT and are selling your farm – or a portion of your farm – where you completed buildings within five years of the VAT reclaim, you will be liable for VAT on the sale.
26.For VAT-registered farmers
If you are registered for VAT, you do not collect flat-rate VAT. Inform your customers that you are registered for VAT and keep copies of all invoices for your VAT return. Ensure you reclaim VAT on purchases of stock from unregistered farmers. VAT on livestock is 4.8% when you are VAT-registered.
27. VAT on the sale of basic payment entitlements
Where a farmer sells basic payment or single farm payment entitlements, and the proceeds exceed €37,500, the transaction is liable to VAT at 23%. The seller needs to register and charge the VAT and pay over to Revenue the VAT charged. Farmers who purchase entitlements are not entitled to reclaim the VAT unless they are VAT-registered.
28 .Contracting and other farm services
Farmers who carry on agricultural services and/or contracting where the turnover exceeds €37,500 must register for VAT. This can bring the whole business into the VAT net. However, proper tax planning can help to avoid this.
29. Ceasing to farm VAT refund
VAT reclaimed in the 12 months prior to ceasing is re-payable to Revenue so it is important to watch the date you cease.
What to watch out for on Capital Gains Tax (CGT)
If a farmer disposes of certain assets such as land, buildings, quota, shares, or entitlements, he or she may be liable to capital gains tax (CGT). The farmer must file a return for any 2020 gains or losses by the return filing date in 2021.
Preliminary tax for CGT is due as follows: disposals up to 30 November 2020 due by 15 December 2020. Disposals in December 2020, tax due 31 January 2021. CGT applies on all disposals whether or not consideration (money) passes. The standard rate is at 33%.
Availability of reliefs is paramount to minimising the tax.
30 Annual Exemption
An annual exemption of €1,270 applies. Therefore, you can make a gain of €1,270 and no tax applies. It is not transferable from one spouse to the other. Transfers between husband and wife are not liable to CGT and losses sustained by one spouse are transferable to the other spouse.
31 Transfer of site to a child
A site of up to one acre and up to a value of €500,000 can be made free from CGT. It must be for the construction of the son/daughter’s principal private residence.
If the house is not built and the site is disposed of or if the house is built, but not retained and occupied for at least three years, the relief can be clawed back. Beware of the value of the site as this will reduce the threshold for gift tax.
32 Entrepreneurial relief
Entrepreneur relief reduces the standard rate of CGT from 33% to 10% for qualifying gains. The value of this relief can be up to €230,000. You can claim entrepreneur relief if you sell all or part of a farm business. It applies on gains up to €1m. Entrepreneur relief does not apply to investments or development land.
33 Retirement relief
This relief is available to farmers over the age of 55. The farmer does not need to be retired to avail of it. The farmer must have owned and farmed the land for 10 consecutive years prior to transfer or prior to entering into a letting/leasing agreement.
There are two main versions. Within the family, farmers can transfer/dispose of chargeable business assets. Provided certain conditions are met, no CGT will apply. If you are over 66, a limit of €3m applies.
For non-family transfers, or transfers to unrelated parties, a farmer can transfer/dispose of assets up to €750,000 and have no liability. If you are over 66, the limit is reduced to €500,000.
34 Disposal to company
No CGT applies where you dispose of all your businesses and all assets to a company. However, conditions apply and need to be looked at on an individual basis.
35 Restructuring relief
If you acquire and dispose of agricultural land within 18 months of the earlier transaction, a CGT relief applies. The sale, purchase swap must be between farmers who spend not less than 50% of their time farming.
If you are disposing of assets, examine if you have unused losses, ask have you assets that are of less value than when you acquired them. Could you dispose of these to generate a loss?
37 Small disposals
Small disposals of moveable property where the value does not exceed €2,540 are exempt from CGT.
38 Transfers between spouses
While exempt from CGT, beware of the effect transfers between spouses may have on retirement relief.
39 Disposal of a business or farm to your child
You may dispose of all or part of your business or farming assets to your child. If you do, you may be entitled to relief from CGT. The amount of relief that you can claim depends on your age at the time of disposal.
You may claim full relief if you are between 55 and 65. If you are 66 or older the relief is restricted to €3m. If your child disposes of the asset within six years, Revenue will withdraw the relief. Your child must pay CGT on the original disposal by you, in addition to the CGT on their own disposal.
Gift tax exemptions
Gift tax applies to a lifetime transfer. Inheritance tax applies to a transfer on death. Where the valuation date is between 1 January and 31 August, the CAT payment date is 31 October in that year. Where the valuation date is between 1 September and 31 January, the CAT payment date is 31 October in the following year.
The thresholds that a person can receive tax-free (on or after 9 October 2019) are as follows:
· Class A – parent: €335,000.
· Class B – relative: € 32,500.
· Class C – non-blood relative: €16,250.
40 Annual exempt amount
A farmer can receive by way of a gift an amount of €3,000 from any person in a calendar year without affecting his/her threshold. No gift or inheritance tax applies between spouses.
41 Certain medical expenses
A gift or inheritance taken exclusively to discharge medical expenses of a permanently incapacitated individual is exempt.
42 Stately houses/works of art/gardens
If you own a property of national, scientific or artistic interest and reasonable access is given to the public during the three years prior to the gift or inheritance, tax relief may apply.
43 Agricultural relief
This relief reduces the value of the asset you are receiving by 90%. If you receive €2m of agricultural property you will only be taxed on €200,000, ie 10% of its value. Ensure that you meet the conditions to qualify for this relief. Beware clawback of the relief if you fail to satisfy the conditions. The recipient must be an “active farmer” to receive this relief.
44 Business relief
If you do not qualify for agricultural relief, business relief may be available. It applies to the transfer of a business or part of a business.
It does not apply to an individual asset. It reduces the value of the asset by 90%.
45 Favourite nephew-niece relief
In certain circumstances, a nephew or niece who has worked on a full-time basis on the farm will be deemed to qualify as your “child” for the purpose of CAT. If they qualify, they can avail of the CAT Group A threshold.
46 Free use of property
If you have the use of property for free or below-market value, be aware that this amount is regarded as an annual benefit. Therefore, it could erode some or all of the amount you can get tax-free.
Certain life insurance policies (where the parent pays a premium into a certain life insurance and it then pays out the proceeds of the policy on the death of the parent) can be exempt from CAT where the proceeds are used to pay CAT. The policy must be approved by Revenue.
Other tax exemptions
47 Annual small benefit for employees
An employer can pay you or any of its employees a one-off voucher of €500 each year tax- and PRSI-free.
Full income tax relief (40%) is to be provided in the year in which the investment is made. This compares with current arrangements where 30% relief is provided upon the initial investment and a further 10% is given after year three, subject to certain conditions.
The annual investment limit will be increased from €150,000 to €250,000. A new €500,000 annual investment limit has been introduced in the case of those who invest for a minimum.
49 Benefit in kind (BIK) – electric cars
The BIK exemption for electric cars and vans with a market value of less than €50,000, is being extended to 31 December 2022. Where the original market value of the electric car or van exceeds €50,000, the preferential tax treatment is also extended to the end of 2022.
Has your business been affected by Covid-19?
If so can you avail of:
- Wage support
- Warehousing of tax liabilities