In farm succession planning, the options available to consider before making final decisions are:
Whatever you decide, ensure you get all the necessary specialist expert advice, such as that from a tax consultant, accountant and solicitor, to make sure you make the most tax-efficient, informed and relevant decision for you and your personal circumstances.
Most family farms in Ireland are inherited, only about 5% of farms are sold. If you decide to sell your farm you may be liable to capital gains tax (CGT). CGT is a tax you pay on any profit/gain made when you dispose of an asset (such as land).
However, retirement relief is available to farmers over the age of 55 and under the age of 66 who sell their farm. 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 sale or transfer (or prior to first letting). The sale proceeds must be less that €750,000.
Where the farmer is over the age of 66, the limit for this relief is reduced to €500,000. Any amount over these limits may be subject to CGT so it is vital to get expert tax advice specific to your own personal circumstances. CGT standard rate is 33% but in certain circumstances you may qualify for entrepreneurial relief, which can reduce the CGT owing to 10%. Retirement reliefs are lifetime limits.
Case study on selling the farm
Joe is a 62 years old farmer, sells his farm for €740,000 in October 2019. Joe can avail of full retirement relief as he is over 55 years and the market value of his farm is less than the threshold of €750,000. He does not need to pay any CGT, but he will need to file his tax return before 31 October 2020.
Transferring the family farm to a family member within a succession farm partnerships structure has advantages as outlined in the succession farm partnership section. Gift tax and inheritance tax are two other areas of consideration here.
Provided the combined assets value being transferred are less than €3.35m (with no previous gifts or inheritances) the vast majority of sons or daughters (or favourite nephew/niece) will not incur a gift tax liability.
However, the recipient must qualify as a farmer (80% of their assets must comprise agricultural property after the gift) to avail of the 90% agricultural relief available to active farmers.
This agricultural relief allows a 90% reduction in the value of the assets being transferred.
Agricultural relief case study
Parents plan to transfer their jointly owned farm to their married daughter Marie, valued at €900,000. Marie’s family home, owned jointly with her husband, is valued at €350,000 with a mortgage of €50,000. Marie has a car worth €25,000. To calculate Marie’s entitlement to agricultural relief, she will be entitled to use a 50% net value of her family home.
Total farm assets as a percentage of total assets is 83.7%, Therefore Marie qualifies for the 80% requirement regarding the agricultural relief.
This involves an income tax incentive (€5,000 annually) to encourage succession through the transfer of the farm assets to the next generation in a planned way, while protecting the transferors. It can be to a son or daughter or to an unrelated qualified young farmer.
The primary condition of the scheme is that the farm must be transferred no sooner than three years and no later than 10 years from the commencement of the partnership.
At least one partner (the farmer) must have farmed at least three hectares for two years prior to the succession farm partnership. Farmers who farm through a company structure are not eligible.
The successor must be a young qualified and trained farmer, under 40 years of age and receiving at least 20% of the partnership profits. The farmer and the successor must sign a legally binding succession agreement undertaking to transfer at least 80% of the farm assets to the successor within three to 10 years of registering the succession farm partnership.
Ideally the partnership should be entered into before the successor’s 32nd birthday to ensure that the stamp duty exemption scheme can be availed of. The income tax credit can only be claimed up to age 40. The €5,000 tax credit is shared on the same basis as profits are shared in the partnership. All tax credits claimed will be clawed back if the transfer does not go ahead.
SFP case study
Tom is 60 years old and his son John, aged 29, set up a succession farm partnership in 2020. They decided their profit sharing ratio is a 60:40 split.
They are eligible for the succession tax credit, so Tom will receive a tax credit of €3,000 per annum and John will receive a tax credit of €2,000 per annum. This will continue for five years. 80% of the farm assets must transfer to John between years 2023 and 2030. If the farm has Basic Payment Scheme (BPS) entitlements, John as a young farmer is entitled to receive BPS top-ups of 25% of the basic payment amount per entitlement (excluding greening) up to a max of 50 entitlements. As John approaches 32 years of age he can also avail of the stamp duty exception relief as a young trained farmer.
Farmers considering partnership as an option should contact a very experienced Teagasc adviser or agricultural consultant.
Leasing is another option. It is very important to have a written agreement in place that’s been drawn up by a professional.
A formal written lease will prevent any future problems such as if the rent isn’t paid or if the tenant has acquired rights. Leases should always be stamped by the Revenue and registered with the Property Services Regulatory Authority.
Income tax on leasing
If a landowner leases land for more than five years to an unconnected person some or all the income may be exempt from income tax.
Depending on the term of the lease, the tax relief can vary from €18,000 to €40,000. Immediate family members do not qualify as lessees. If lands are held jointly, such as husband and wife, both parties can claim the exempted amounts annually. Rental income is not exempt from PRSI or USC tax.
Leasing can be quite an attractive option for farmers wishing to retire fully or part time.
Whatever decision you make regarding succession farm planning, it is vital to get expert advice from all the professionals to ensure you make the most tax-efficient plan to suit your own personal circumstances.