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Farmers: The Big Question?

Should we operate as a sole trader or as a company?

This is a very individual decision as there are so many issues and taxes to consider and everyone’s personal circumstances are different. For the purpose of this article we are going to take a farmer in his mid thirties, married with two children. His wife does not work outside the home but works on the farm.

Income Tax?

Firstly what is the income from the farm compared to his cost of living? In a limited liability company, any trading profit is taxed at 12.5% instead of 52%. Also the level of bank borrowings would come into this equation.

If a company is formed, both husband and wife are now employees of the company (separate legal entity). Her employment is now recognised as an insurable employment and depending on her contributions, she will be entitled to social welfare entitlements including pension. This rule applies to all sole trade businesses, as any spousal employment, where the employer is a sole trader, is non insurable employment. The spouse can become insurable by either running the business as a partnership or a company.

Company Pensions

Company Directors pension limits are different. A company can make contributions to build up a pension fund which will provide a director with a pension of two thirds final pensionable salary subject to a maximum salary of €150k and a maximum fundable value of €2.3million (€5.4m). This increased level of pension contributions under the company structure allows for consideration of a Small Self-Administered Pension Scheme. They can give members greater control over their pension fund.

Issues Which Arise on Incorporation

Stamp duty

2% stamp duty arises on the transfer of land to Company. This is a cost that has to be compared to other tax savings. Stamp duty does not arise if land is leased.

Capital Gains Tax (CGT)

Capital Gains Tax is a Tax on the Disposal of an Asset. Is the sole trade farmer disposing of an asset? Yes. Legal title transfers to a separate legal entity. Will CGT apply? YES. However, relief may be available if all assets (land buildings & entitlements) are transferred and the consideration includes company shares. Note: entitlements are an asset and subject to CGT.

In the future, if his children want to live near them and he wants to give them a site. What Happens? At the moment, a parent can dispose of a site to a child up to the value of €500k without incurring a Capital Gains Tax Liability. Under current legislation this option doesn’t arise for a company. However, legislation may change to take beneficial ownership into consideration.

Double Tax Trap

A company will pay tax on its investments income and capital gains. If the directors want to withdraw any remaining funds they will pay income tax on any funds withdrawn.

Capital Acquisition Tax

We cannot forget about the future and how to pass the farm onto the next generation. Also what happens when the farmer wants to retire? There are different reliefs available, retirement relief and business relief but if incorporating then the timing of incorporation and management of value in the company are critical. It must also be noted that at the moment shares in a company will not constitute agricultural property for agricultural relief purposes for the donee/successor.

Conclusion

In most incorporation structures the farmer will invariably decide to retain the land personally and will only transfer the trade to the company (leasing entitlements have complications). There are advantages to operating through a company, but you need to be mindful of transferring assets to the company and making long term decisions for short term gains and consideration must be given to all taxes.

Zandra Horgan AITI Chartered Tax Adviser.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice.

Please contact HFS accountants for more detailed advice on 057 874 1688.