The pros and cons of putting the farm into company status
Q I am a young trained farmer and my father, having reached retirement age, has decided to transfer the family suckler farm to me.
The farm is returning a reasonable income but it would nonetheless require me to have a job off-farm in order to afford my own home etc. I intend to expand the farm and am considering a change to dairy which might give me a greater source of income so that I would not need to work off farm.
Am I better to put the farm business into a company structure or to operate it as a sole trader, as my father has done in the past?
A. For many young (or not so young) farmers starting out, there are two big issues which you should plan for prior to the transfer and commencing farming. The first centres around taxation, mainly capital acquisitions taxes which are gift and inheritance tax, paid on acquiring the farm.
The second issue that ought to be given consideration is the business structure in which you plan to operate. There are a few options open to younger farmers, including sole trader, limited company, unlimited company, partnership (registered and unregistered) etc. For the vast majority of farmers who are not engaging in a partnership the choice is between operating as a sole trader or operating the farm business in a limited liability company.
Most farmers chose not to operate an unlimited company as there is effectively no limit to the liability of the directors for the actions including losses of the business. The main advantages that an unlimited company enjoys are: (i) the company’s tax returns are not available for the public to access, unlike a limited liability company (this condition will only be available until 2022) and (ii) the company pays corporation tax at 12.5pc currently which is the same as a limited liability company
Partnership and Limited Liability
The biggest difference between operating a business as a limited company and operating as a sole trader is the rate at which tax is paid on the profits. With corporation tax still resting at 12.5pc by comparison with the higher band tax rate of upwards of 50pc, it is certainly worth any farmer’s time considering the pros and cons.
In recent years operating a farm business as a limited company has certainly become an option for dairy farmers as well as larger tillage and drystock farmers. The following are some of the main considerations involved.
Incorporation or forming a private limited company can provide farmers with an opportunity to plan and manage taxes more efficiently but succession and finances are the critical issues to consider.
A limited liability company is a separate legal entity. In most cases the land and buildings are not transferred to the company, but the stock, tools and equipment are transferred.
If the machinery with loans attached are transferred, the owner will need to get agreement from the financier or bank to proceed with incorporation. You will also need to transfer your herd into the company name.
Where entitlements are transferred into the company it is advisable to check with your agricultural consultant to ensure entitlements are ‘activated’ to prevent losing them to the national reserve.
The main beneficiaries are farmers in expansion mode, that is those who are buying land, building on the farm or investing heavily in new machinery.
Paying the lower rate of corporation at 12.5pc is an advantage as all of the money made by the farm can be used to pay the debts or loans once the tax has been paid. This allows you to pay off loans much quicker than if you had to pay tax at upwards of 50pc on the money before you made the repayments. Farmers who pay tax at the higher rate and do not intend to spend all of their income in that year should also benefit.
Another significant advantage is that no Universal Social Charge (USC) or Pay Related Social Charge (PRSI) are payable on company profits.
Off farm income
Those with an off-farm income which would push their on-farm earnings into the higher tax bracket could also benefit from operating in a limited company. Where this farmer is not drawing heavily on the farm income it allows more monies to be available for farm improvements etc.
If you choose to pay yourself a salary from the company you will pay the full rate of income tax on that money, including where it pushes you into the higher tax band.
Capital Acquisitions Tax (CAT)
The standard rate of CAT for gifts and inheritances received on or after 6 December 2012 is 33pc.
The amount/value of a gift or inheritance which can be received tax free depends on the relationship to the donor.
The CAT thresholds for gifts or inheritances on or after 12/10/2016 are:
Group A (A son or daughter of the person giving the gift or inheritance) is €310,000.
Group B (A parent, brother, sister, niece, nephew, grandparent, grandchild, lineal ancestor or a lineal descendant of the disponer -person who transfers the property to another) is €32,500.
Group C (People with a relationship to the disponer not already covered in Groups A or B) is €16,250.
When you consider the above amounts which can be gifted or inherited without attracting CAT of some sort, for many the family farm will be valued much higher.
Agricultural relief is a relief from the above inheritance tax thresholds in certain circumstances. If applicable, it can provide up to 90pc relief on gifts/inheritances of relevant agricultural property.
The relief is not a full relief from inheritance tax. It is relief in the form of a deduction of 90pc from the market value of the agricultural property. In other words, the beneficiary can reduce the value of the relevant gift/inheritance of agricultural property by 90pc of its value for the purposes of calculating inheritance tax.
For a beneficiary to qualify for this relief certain criteria need to be complied with:-
The property comprising of the gift/inheritance must be agricultural property at the date of the gift /inheritance.
The beneficiary must be a ‘farmer’ at the valuation date (which in general terms means the date the property is valued).
It should be noted that it is not the everyday definition of a farmer that applies here. In order to be able to benefit from the relief, a farmer is a person who can show that not less than 80pc of their assets, after receiving a gift, comprises of agricultural property. You must also either:
Farm the agricultural property on a commercial basis for at least six years from that date or lease the property to someone who farms the agricultural property on a commercial basis for at least six years from that date.
Additionally, the person receiving the gift or inheritance, or the person leasing the property must either have an approved agricultural qualification or farm the agricultural property for at least 50pc of their normal working hours.
If you are not eligible for Agricultural relief you should consider Business relief as it has similar advantages and is less restrictive in some ways.
Theresa Murphy is a barrister based in Ardrahan, Co Galway