Family Farm Succession
Family farm succession can be a difficult topic to discuss, but the value of preparing a plan is well worth it.
In this blog I am going to look at the pitfalls that are out there, how avoid these and how proper tax planning can save the person giving and receiving the asset thousands of euros.
Succession planning is a process to plan for the transfer of knowledge, skills, labour, management, control and ownership of the farm business between one generation and the next or successor generation. It is a process and not an event. It takes time and effort to work through and develop a comprehensive plan that best meets the needs of the farm family.
Tough questions have to be asked. Is there a potential successor? If yes, does he or she have the skills, abilities, knowledge and desire to successfully operate the farm business? If there is no successor, what are the options? Is selling part or all of the farm assets an option? How long does the current operator(s) want to continue running the business? Only the individual(s) involved can answer these questions.
Planning the transfer of the family farm to the next generation can be a difficult task, but it is important to make preparations early to avoid potential problems before they arise. The majority of farm families do not plan adequately for succession, so farmers and potential successors are encouraged to be informed.
Making a Will
- Making your Will in quite a significant legal task to undertake.
- It is a legal document that sets out how you wish your assets and possessions to be shared out after your death.
- A Will is often thought off too lightly. If completed incorrectly it can have serious consequences for those who are left behind.
- When you die your affair need do be all settled up. It’s likely that there will be bills to be paid and property too be distributed.
- A “Will” will decide what will happen to your assets with minimum fuss and delay.
- This uncompleted task then comes the “decision”. If you die without making a “Will” then what happens your assets will be determined by law (Inestate).
Rules for Making a Valid Will
- The will must be in writing
- You must
– be over 18 (if you are or have been married you can be under 18)
– be of sound mind
– sign or mark the will or acknowledge the signature or mark in the presence of two witnesses.Your two witnesses must sign the will in your presence
- Your two witnesses cannot be people who will gain from your will and they must be present with you at the same time for their attestation to be valid. The witnesses’ spouses/civil partners also cannot gain from your will.
- Your witnesses must see you sign the will but they do not have to see what is written in it.
- The signature or mark must be at the end of the will.
These are legal requirements and if they any of them are not met, the will is not valid. If you want to change your will after you make it, you can add a codicil (amendment or change) to your will; this codicil must meet the same requirements set out above.
A Will Should Contain
You do not have to have your will in any set format. However, it is important that the will has the following:
- Your name and address.
- A statement that says you revoke or disown all earlier wills or codicils, such as “I hereby revoke all former wills and testamentary instruments made by me and declare this to be my last will and testament”.
- A clause or section of your will that appoints one or more executors, or people who will carry out your wishes in your will after you die, and stating these executors’ names and addresses.
- A residuary clause, which is a section in your will that sets out how property not effectively dealt with in the will, should be distributed. This is important because specific bequests, such as “I leave x… to Sean Murphy” can fail (be considered invalid), and then revert to the residue to be decided by this residuary clause. Your residuary clause could say that anything not covered in your will would be a gift or legacy to someone, like “The remainder of my estate I leave to my daughter, Mary”.
- Your will should be dated and signed by you and your witnesses. Usually, these signatures are underneath a line in the will that states “Signed by the testator in the presence of us and by us in the presence of the testator”. This statement is called “an attestation clause”. An attestation clause is not a formal requirement of a valid will, but it is advisable to include it in your will as it constitutes evidence that your will has been validly executed.
Capital Gains Tax or CGT
To apply tax on the increase in value of assets such as land or buildings while these assets were in the hands of the person now considering transferring them. The tax only applies for the disponer (the person who owns the asset and is looking to transfer it) who is transferring the asset during his/her lifetime. The current rate of tax is 33%.
Gain = Current value at date of disposal – the value of the asset when first acquired.
As stated above this is a crude measure in that the gain can be adjusted to take account of improvements made to the asset and account can also be taken of the effect of inflation on the value of the asset. The main saviour in reducing the impact of CGT is via its main relief called CGT Retirement Relief which can greatly reduce or eliminate the tax completely.
Retirement Relief from Capital Gains Tax (CGT) is available where an individual, who is at least 55 years of age (with some exceptions such as chronic ill-health) disposes, by way of sale or gift, of the whole or part of his/her qualifying assets. Although the relief is commonly known as “retirement relief” a claimant does not have to retire in order to qualify. Retirement relief from CGT is available to non-agricultural businesses also.
An explanation of “qualifying assets” for CGT relief is provided here. Please note that some of the terms used have specific meanings for the purpose of the relief. Professional advice should be sought for more comprehensive explanations of “qualifying assets”.
List of Qualifying Assets relevant to the farming sector:
- The chargeable business asset of the individual which he/she has owned for at least 10 years up to the disposal date and which have been his chargeable business assets throughout that 10 year period.
- Single Farm Payment Entitlements where they are disposed of at the same time and to the same person as land, to the extent that the land would support a claim to payment in respect of those payment entitlements.
- Land leased under the Scheme of Early Retirement from Farming, where for a period of not less than 10 years prior to the land being leased it was owned by the individual claiming relief and used by him or her for the purposes of farming throughout that period.
- Land which was let during the 5-year period prior to its disposal under a compulsory purchase order for the purpose of road construction and certain related activities but, prior to its first letting, was farmed for 10 years by the person making the disposal.
- Land which was let at any time during the 25 years before disposal but, prior to its first letting, was farmed for 10 years by the individual making the disposal and the disposal is to a child.
- Land which was leased out on a long term basis (for a minimum of 5 years and a maximum of 25 years) but, prior to its first letting, was farmed for 10 years by the owner and the disposal is to a person other than a child – Budget 2015 introduced temporary qualifying arrangements around this for those who may have let land out on a con-acre basis.
The amount of retirement relief from CGT available is dependent on whether qualifying assets transferred are
- Parent to child transfers or;
- Transfers other than to a child
Capital Acquisitions Tax (CAT) is a tax that targets the person receiving the assets via a gift (lifetime transfer) or via an inheritance (on a death). So unlike
Capital Gains Tax (CGT) this CAT could apply where assets pass by lifetime transfer or on a death. This tax is also levied at 33% on the received benefit (the gift or inheritance) and the tax liability is calculated bases on the total value of the gift or inheritance on the date that it is received. It can apply to assets such as land, buildings and cash. However there are also some useful measures and reliefs to reduce/ eliminate the exposure to CAT. There are tax-free thresholds that apply depending on the relationship between the parties to the transfer with parent to child transfers having the highest threshold which means that they can transfer assets of higher value without attracting any tax.
Relationship to Donor Tax Class Thresholds
Child, favourite niece/nephew ———————————€280,000
Brother, sister, children of brother, sister——————–€30,150
Any other person ————————————————–€15,075
There is a very useful CAT relief called Agricultural Relief which if applicable will reduce the value of the assets for calculation of the tax to 10% of its value.
To qualify for Agricultural Relief the receiver of the gift/ inheritance must pass what is known as the Farmer Test. Passing this test requires that the receiver has at least 80% of their total assets invested in agricultural assets.
From 1st January 2015 there is also an additional requirement for the receiver of the agricultural assets to be classified as an “active farmer”.
You should discuss the possibility of availing of agricultural relief of your own particular case with your accountant and solicitor as early as possible in the farm transfer process.
While there are serious taxes that are applicable to any farmer transferring their farm to a son or a daughter there are also great reliefs in place to counteract these taxes. With these reliefs in place it is a great time to transfer the family farm and is something anyone in this situation should look at closely. Any farmer thinking of transferring the farm should consult their Agricultural Advisor, Accountant and their Solicitor. They have an important role to play in the smooth running of the process.
Information sourced from The Farmers Handbook