In Ireland over the last few decades, there has been a move away from personal ownership of business and wealth. Company ownership is more the norm. The last bastion here is farming. Tradition tends to rule and farmland is held within families, passed down through generations.
Alongside tradition, tax can be quoted as a barrier to a company holding a farm.
It is indeed true that tax can be a cost especially on transfer of farm to a company. But after this there can then be significant tax savings on farm profits. And crucially, a company can be passed to the next generation in a similar tax efficient manner as with farmland owned personally.
As ever with tax, real life can be more complicated but here is some detail which serves as a start point for any analysis here.
Starting out
The significant implementation cost to company ownership can be stamp duty. For existing farms, it can be expensive to transfer the farm outright to the company. Stamp duty at 7.5% will arise on the outright acquisition of land by a company. An alternative is for a farmer to lease the land instead to the company. Stamp duty will be reduced or the lease could even be regarded as exempt, depending on circumstances.
Transferring the farm, or even part, to a company will have lots of other tax, and practical commercial impacts too. It is possible for all these to be managed effectively.
In all circumstances where farmland is to be acquired with a 7.5% stamp duty cost* budgeted for, then acquisition by a company should be considered. And where the acquisition is to be financed by an external loan then a company should be the default option considered. There would need to be a convincing set of circumstances to hold this land personally. It is much cheaper to finance loan capital repayments through a company.
Operating a company - Tax aspects
By far the most significant tax advantage in operating through a company is a tax rate of 12.5% on annual farm profits. This means more money (post tax cash) is available for reinvestment into the business or to finance capital repayments on bank loans.
A corporate structure means that a farmer has full flexibility in how much salary to take. This salary can be tailored annually to meet requirements. Clearly, if all profits are needed personally then there is no longer any benefit of the 12.5% corporate tax rate.
Another oft quoted benefit is a company has a lot more scope to fund a director’s pension. For tax purposes, there is no limit on company contributions in contrast with the relatively low cap for an individual farmer (sole trader). It may also be possible to enable cash built up in the company to finance an efficient exit package for the farmer on transfer to the next generation.
Financing €100,000 capital loan payment out of farm profits - A top rate individual taxpayer would need to earn €222,222 pre-tax profits to finance the payment. In contrast, a company needs just €114,285 such profits
A significant commercial advantage of a company is the limited liability protection. This will need to be balanced with the downside - the publication of annual accounts. An unlimited liability company does not have any such obligation and may be preferred.
There can also be flexibility as to how operations are structured. A company can purchase new land and the existing family land be retained personally. This land could be leased to the company which would carry out all farm operations. Thus benefits of corporate could be obtained and the individual would still hold a significant valuable asset in their own name.
Probably the main tax disadvantage of a company arises where all wealth is held within the structure and the shareholder needs to realize significant cash personally. This could normally be achieved with sale of a parcel of land. However, the sale of same by a company can be expensive. This could give rise to the famed – “double charge to tax” ..whereby the company pays tax on the disposal and the shareholder pays tax again on the net proceeds. These proceeds can be at marginal income tax rates. If the land parcel was in a separate company and that company is sold by the farmer, then this would simplify matters. The sale would only involve one tax trigger. An even simpler scenario is that noted above where some land remains in the individual’s name and is merely leased to the company. So whilst tax costs can be minimized, the structure will be crucial.
Succession
On succession, the default rate of Capital Acquisitions Tax (Inheritance Tax) is 33%. This can reduce to an immaterial amount for farmland with the application of Agricultural Relief or Business Relief. A similar result can arise on inheritance of a company holding farmland, but here only Business Relief would be available. Agricultural Relief and Business Relief are broadly similar but have some important differences.
These differences could result in additional tax costs with a corporate structure. This will depend on how plans are implemented. A company may need to be in operation for two years prior to the date of inheritance for Business Relief to apply.
Lots of factors can interplay… because company shares (or Directors loan) are not regarded as “Agricultural Property” for tax purposes, this may mean a shareholder would not qualify for Agricultural Relief in future. This can, for example, result in increased tax costs on subsequent inheritance of a farmhouse and farm (the farm may qualify for Business Relief but not the house). It can also reduce planning flexibility if other inheritances are expected – if (say) cash is received on condition that it is invested by a beneficiary in a farm then this can potentially qualify for Agricultural Relief, but not Business Relief (the latter would be more likely if value is in Company Farm)
The full succession impacts of a corporate structure need to be planned for. This should include plans for any future inheritances by the shareholder and availability of reliefs at that point.
Summary
If you are a farmer then you should seriously consider operating as a corporate where you are:
Contemplating a land purchase with external (or family) debt finance or
Generating significant taxable profits each year well in excess of your lifestyle/personal needs.
The articles outlines some of the headline tax matters; each case will be different and need to be reviewed. There will also be lots of commercial aspects which need to be considered and planned for too.
*Note re stamp duty...
For farmers a reduction in the default 7.5% stamp duty rate can apply in certain circumstances:
Acquisition of farm from relative (consanguinity relief): Reduces the stamp duty to 1% where the seller and acquirer are related (restrictions apply e.g. inlaws, cousins).
Acquisition by a Young trained farmer relief: Exemption from stamp duty where Young Trained Farmer relief applies (various conditions here – farmer needs to be under 35, have a certain farm qualification etc)
Farm consolidation relief: This reduces the stamp duty to 1% on transactions that qualify for a farm restructuring certificate and satisfy certain other conditions
