How Farmers Can Benefit From Tax Breaks On Land Sales If They Are Eligible For ‘Entrepreneur Relief’

The generally held perception is that any disposal of land resulting in a capital gains tax at the rate of 33pc.

This is not always the case as many disposals will qualify for Entrepreneur Relief which offers business asset owners the opportunity of disposing of those assets at a 10pc rate of tax on any gains made subject to certain limits and conditions.

While most farmers would not class themselves as entrepreneurs, for the purposes of this relief they fall in under this heading and I’m sure they will be happy to accept the title ‘entrepreneur’ if they are to benefit.

The relief applies to business assets or shares which they have owned for at least 3 years. A Capital Gains Tax Rate of 10pc will apply to the net chargeable gains arising on the disposal subject to a lifetime limit of a total of €1m. in actual gains

While the relief extends to disposals of share-holdings in unquoted companies such as farming companies, it will not be available to disposals made by the actual company itself. Neither is it available on the sale of quoted shares such as Glanbia or Kerry shares

RATE OF TAX

The effect of the relief is to reduce the rate of tax on a disposal of chargeable business assets from the standard rate of 33pc to 10pc for qualifying gains of up to €1m in the person’s lifetime. Thus, the maximum value of the relief is €230,000.

QUALIFYING CONDITIONS

The qualifying conditions are as follows;

The disposal must relate to a ‘qualifying business’ which will cover the vast majority of active farmers whether trading as sole traders or companies.

The disposal must comprise “chargeable business assets” which includes agricultural land which was used for the purpose of the business. Land that is leased out would not qualify as a chargeable business asset.

The person claiming the relief must have beneficially owned the chargeable business assets for a continuous period of three out of the five years before the date of disposal.

The person claiming the relief must have spent 50pc or more of his/her working time in the service of that business for a continuous period of three out of five years immediately before the disposal of the assets or shares in question.

ENTREPRENEUR versus RETIREMENT RELIEF

Most disposals of agricultural land that are less than €750,000 for persons over 55 and under 66 or €500,000 for persons over 66, will be exempt from Capital Gains Tax due to the availability of Retirement relief which applies to land that has been owned and farmed for 10 years prior to the date of sale or prior to first letting.

However where the disposal proceeds are somewhat above those limits either Entrepreneur or Retirement reliefs may be an option to reduce the tax bill.

Accordingly, it may be necessary to determine which relief works best.

The following case studies best illustrate how Entrepreneur Relief or Retirement Relief may prove to be the better option in differing circumstances.

'While most farmers would not class themselves as entrepreneurs, for the purposes of this relief they fall in under this heading'

‘While most farmers would not class themselves as entrepreneurs, for the purposes of this relief they fall in under this heading’

CAUTION

As with most tax relief measures Entrepreneur Relief may require a degree of planning.

For example, where a disposal of assets is a possibility in the short to medium term and where the individual is contemplating transferring land to joint names with a spouse or perhaps changing over to a company structure, they should seek advice as to whether such moves will interfere with the three year time limits set down for eligibility for Entrepreneur Relief.

Martin O’Sullivan is the author of the ACA Farmers Handbook. He is a partner in O’Sullivan Malone and Company, accountants and registered auditors; www.som.ie

Case study

No Retirement Relief

Joe Farmer is 60 years of age disposes of land for €1.2m and satisfies all of the conditions of both Entrepreneur Relief and Retirement Relief. Assuming a base cost of €400,000 which includes allowable deductions and his personal exemption, we will look at Joe’s CGT liability under the following headings;

Normal CGT treatment with no relief

In the absence of any relief the taxable gain is €800,000 giving rise to a liability at 33pc of €264,000.

Claiming Retirement Relief

Assuming Joe is over 55 and under 66 he may claim retirement relief on €750,000 of the gross proceeds and marginal relief on the remainder. This will give rise to a liability of €225,000 so he saves € 39.000 by claiming Retirement Relief.

Claiming Entrepreneur Relief

As Joe’s gain is less than €1m his liability works out at 10pc of €800,000, i.e., €80,000, so he saves €184,000.

Conclusion

As the tax due under Entrepreneur relief is less than Retirement relief there is no Retirement relief and the lower CGT liability of €80,000 is due.

TAXABLE GAIN

Peter Farmer is 70 years of age and disposes of land for €530,000 and satisfies all of the conditions of both Entrepreneur Relief and Retirement Relief. Assuming a base cost of €200,000 which includes allowable deductions and his personal exemption, we will look at Peter’s CGT liability under the following headings;

Normal CGT treatment with no relief

In the absence of any relief the taxable gain is €330,000 giving rise to a liability at 33pc of €108,900,

Claiming Retirement Relief

Peter may claim retirement relief exemption on €500,000 with the balance of €30,000 being subject to 50pc tax, so his liability is €15,000.

Claiming Entrepreneur Relief

Peter’s taxable gain is €330,000 so his liability works out at 10pc, i.e., €33,000.

Conclusion

As Retirement Relief is more beneficial yielding a saving of €93,900 as compared to Entrepreneur Relief yielding a saving of €75,900, Peter will opt for Retirement Relief.

(Source – Irish Independent – Indo Farming – Martin O Sullivan – 13/07/2018)

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Rural Enterprise Skillnet
Rural Enterprise Skillnet

The Rural Enterprise Skillnet is funded by member companies and the Training Networks Programme, an initiative of Skillnets Ltd. funded from the National Training Fund through the Department of Education and Skills.

Read More