Farming Law & Tax Update 2017 19 January 2017 Kieran Coughlan

Disclaimer Obtain relevant professional advice (legal and taxation) relevant to your own circumstances The following is intended as a guide and does not construe advice in relation to any circumstance The accompanying information is not to be regarded as comprehensive in dealing with all relevant taxes No liability is accepted to any party as result of any action or inaction as a result of the use or misuse of the following information The following information is copyright to Coughlan Accounting & Taxation Services and may not be reproduced, circulated or shared with others without prior written consent © 2017

Background Kieran Coughlan, Coughlan Accounting & Taxation Services Limited, 086-8678296

Order of business Part 1 Tax changes for 2016 / 2017 - a farmers perspective Part 2 Succession farm partnerships Part 3 Farm Company incorporation – an option? Part 4 Planning the transfer of the family farm Part 5 Practical tax planning

Tax changes for 2016 / 2017 Income tax USC PRSI Capital Gains Tax Gift Tax Stamp Duty

Income tax changes 2016 / 2017 Increase in Self-Employed tax credit to €950 per annum Commenced from 2016 @ €550, n/a to those with PAYE tax credit TAX PLANNING: - Consider farming in partnership with spouse - PRSI benefits - Additional tax band - Reduced USC Increase in home carer credit to €1,100 2015: €810, 2016 €1,000, 2017 €1,100 Income limits increased to €7,200 TAX PLANNING: - Second spouse working versus stay at home parent/carer - Part time employment hugely efficient – 2ndry PRSI benefits +/- Carers allowance - Utilise in conjunction with Childcare Services Relief

Income tax changes 2016/2017 Energy efficient equipment Extension of 100% tax relief (accelerated allowances) to individuals Lighting, motors and drives, heating and electricity, refrigeration and cooling etc Minimum spending typically €1,000 TAX PLANNING: - Spec’ing up new equipment & buildings fitout - Separate invoicing in respect of qualifying elements

Income tax changes 2016 / 2017 Income averaging Origins Finance Act 1981 Reformed as part of Agri-Taxation Review Assessable farm profits averaged over 3 years changing to average over 5 years Extension to 5 years should reduce deviation of tax liability – consistent tax bills Suitability with volatility?? Broadening of relief to farmers with ancillary income from activities carried on the land Extension to 5 years has major disadvantage – doubling of potential claw back period from 2 years to 4 years FA2016 new relief allowing farmers step out of averaging for one year

Income tax changes 2016 / 2017 Income Averaging TAX PLANNING: Evaluate is income averaging actually saving tax over longer term Optimum time to exit averaging w.a.v minimsing clawbacks Planning cessation to trade to avoid clawback Using opt-out for year 2016 or future years Alternatives – pay as you go prelim Company incorporation

Income tax 2016 / 2017 New Succession Farm Partnerships

USC 2016 / 2017 Significant reductions in rates 2015 Rate 2016 2017 €12,012 1.5% 1% 0.5% €5,564 3.5% €6,656 3% €6,760 2.5% €52,468 7% €51,376 5.5% €51,272 5% Balance 8%

PRSI 2016 / 2017 Increases in certain social welfare rates Paternity benefit introduced Extension of invalidity pension to self-employed Dental, Optical and Aural benefits extended to self-employed + dependent spouse/partner/co-habitant Farm Assist income disregards restored from March 2017 – off farm income assessed at 70% to pre 2013 levels Tapered PRSI Class A rates now from €352 to €424 TAX PLANNING: Maintaining PRSI record Applying for relevant benefits

Capital Gains Tax Entrepreneur Relief - reduced rate of CGT of 20% in the case of a disposal of chargeable business assets made by an individual on or after 1 January 2016 up to a lifetime limit of €1m. TAX PLANNING Retirement Relief vrs Entrepreneur Relief

New Entrepreneur Relief Capital Gains Tax Retirement Relief New Entrepreneur Relief Complete relief from CGT Cap of €750k / €500k No Cap re children if < 66 else 3m Lifetime limit >55 age Owned assets for 10 years Used assets for 10 years of ownership Available for land which has been leased out (retired farmer) 20% CGT Cap of €1m Lifetime limit No age restriction 3 year ownership Not available for land rented out Wider scope that RR – “business” rather than trade & profession

Capital Gains Tax TAX PLANNING If RR not available consider Entrepreneur Relief If RR restricted consider Entrepreneur Relief for excess

Capital Gains Tax Retirement Relief (RR)– 31/12/2016 end of transition which allowed land owners convert from con-acre to lease arrangements RR can continue to apply to land which is let where: Owner over 55 Owned land and worked land for > 10 years prior to first letting Sale or transfer within 25 years In the case of sale or transfer to 3rd party, new rules insist land must be let for periods of not less than 5 years TAX PLANNING: For those ceasing to farm - engage in leasing to keep options open Leasing for successive periods

Capital Gains Tax Retirement Relief Leased land - TAX PLANNING: For those ceasing to farm - engage in leasing to keep options open Leasing for successive periods Strict interpretation – each letting for at least 5 years Sale or transfer within lease term?

Capital Gains Tax Restructuring relief extended from 01/01/2015 to 31/12/2018

Gift & Inheritance tax (CAT) Restriction of Dwelling house exemption Inheritances Donor must have occupied house as only/main residence at date of death Beneficiary lived in house for 3 years pre inheritance Beneficiary not entitled to any other dwelling house Must continue to occupy for 6 years subsequent Gifts to dependent relatives Donor need not have occupied house as PPR Dependent relative – over 65 or permanently and totally incapacitated

Gift & Inheritance tax (CAT) Restriction of Dwelling house exemption Tax Planning Incorporate dwelling house exemption into Will planning while children are young

Gifts & Inheritance Tax (CAT) Agricultural Relief post 01/01/2015 Farmer = a) > 80% Agricultural assets & b) i)farms land > 50% time or ii) trained farmer or iii) leases land for 6 years to i) or ii) Restriction in relation to farm houses TAX PLANNING - Consider Business Relief as alternative

Gift & Inheritance tax (CAT) Restriction of Dwelling house exemption Inheritances Donor must have occupied house as only/main residence at date of death Beneficiary lived in house for 3 years pre inheritance Beneficiary not entitled to any other dwelling house Must continue to occupy for 6 years subsequent Gifts to dependent relatives Donor need not have occupied house as PPR Dependent relative – over 65 or permanently and totally incapacitated

Stamp Duty Young Trained Farmers Exemption extended to 31/12/2018 Consanguinity Relief - from 01/01/2016; Applicable only to land Transferor < 67 Must either farm land > 6 years or Lease land for more than 6 years If farming must either be trained or > 50% of N.W. time

Part 2

Succession Farm Partnerships Introduction of new Succession Farm Partnerships (EU State Aid Approval Granted, pending admin arrangements) Transfer 80% to successor within 3 to 10 years Income tax credit worth up to €25,000 – no credit payable where successor over 40 in year of assessment Credits split according to partnership profits Stock relief 50% Disadvantages Formal registration with business plan Potential for clawback Non compatible with incorporation Time frame for Stamp Duty Relief

Succession Farm Partnerships More Detail: Existing farmer, at least 3 ha (owned or leased), > 2 years preceding partnership Successor entitled to at least 20% profits Partnership agreement details of the farm assets of partnership conditions to which the transfer or sale will be subject, the year in which the transfer or sale will take place, any other terms which the successor and farmer agree to, including any terms in relation to the farm assets, the conduct of the farming trade or the creation of any rights of residence in dwellings on the farm land.

Succession Farm Partnerships TAX PLANNING: Is this a viable option? Are parties ready to enter a formal agreement? Alternatives – “regular” partnerships, company incorporation, family wages etc. Look at medium term – how will business have changed over medium term Flexibility within agreement – sell or transfer, timing, Ultimate option to default on agreement Coincide with stock relief & stamp duty relief (special care consanguinity relief > 67) Special care – will other reliefs be available at the nominated point of transfer?

Part 3

Farm Incorporation Advantages Disadvantages 12,5% Rate Directors loan Enhanced pension options PRSI benefits Limited liabiltiy Stability of personal taxation – management of volatiltiy Disadvantages Higher level of compliance CRO reporting Company profits remain such Higher rate of CT to passive income PRSI costs Future succession becomes more complicated “Costs” of incorporation

Taxation move towards incorporation Lease land exemption 3rd parties Extension of new Agricultural Relief rules Farm restructuring relief

Farm incorporation First Stage - Assess viability Current profits and expected future profits Capital allowances remaining …expected income tax position thereon Evaluate level of drawings and expected future drawings Profits versus drawings ...capacity of company to accumulate profits = potential tax savings from incorporation

Farm incorporation Second stage – costs of incorporating Direct costs i) company incorporation fee ii) professional fees; Accountant Tax Consultant Agricultural Consultant Legal fees (will) Auctioneers fee – valuations / lease Hidden costs - tax clawbacks i) Income averaging ii) Agricultural Relief iii) Balancing charges iv) Banking charges v) Insurance costs Future costs i) Loss of stamp duty relief ii) Double charge to CGT iii) Non-availability of certain reliefs

Farm incorporation Third stage – tax planning for incorporation and for succession Avoiding or minimising tax clawbacks, avoiding pitfalls Maximising directors loans tax efficiently Tax planning for Wills Develop scenarios for tax efficient succession Land Land + Company Company only Non-succession options

Farm incorporation Fourth stage Company incorporation Banking facilities Registration for taxes Department of Agriculture – BPS / Herd Number Notification of suppliers and customers, milk supplier Lease agreement Transfer of machinery Updating of insurance Milk production shares

Farm incorporation Fifth stage Recap along the way

Planning the transfer of family farm DEAD ALIVE No stamp duty No CGT Young trained farmer relief Half rate (consanguinity) relief Retirement relief Entrepreneur relef

Planning the transfer of family farm DEAD ALIVE Inheritance Tax (CAT) Agricultural Relief Business Relief Gift tax (CAT) Agricultural Relief Business Relief

Planning the transfer of family farm DEAD ALIVE Practical disadvantages Fair Deal Scheme Stale blood Ability to claim Ag-Relief may be compromised (asset test) Ability to claim Business Relief may be compromised Potential restriction of tax relief regime Disputes & disputed wills Probate Practical disadvantages CAT, CGT and SD to negotiate Assoc. potential for clawbacks Making provisions for transferors Marital breakdown Dual legal representation Releasing control

Tax Planning pre & post death Availing of existing reliefs Small gift exemption Will planning Post Available Reliefs Specific bequests & disclaimers Deeds of family arrangement Discretionary Trusts Section 72 policy

Almost the worst time to engage in tax planning…

Planned approach Identify successor Identify preferred timing of transfer CONSIDER DISCUSSING PLANS WITH SUCCESSOR & OTHERS Assess availability of tax reliefs at expected timing of transfer Contingency planning (will in the case of lifetime transfer) Contingency planning (alternative successor in the case of eventualities) Contingency planning (restriction of tax reliefs) Provisions to protect you & protect farm

Wills Designing Will to avoid disputes – legal right share Spouse / Civil Partner / Co-habitants Valid wills & Intestacy Talk Letter of wishes

Will Planning – Legal Right Share *Married & Civil Partners equivalent Valid Will Intestacy / Invalid Will Married (no children / grandchildren) 50% 100% Married (+ children / grandchildren) 33% 67% Co-habitant 0%

Will Planning – Legal Right Share Valid Will Intestacy / Invalid Will Children (parents spouse deceased) ** 100% Children (parents spouse alive 33% **Children no automatic right – can contest in the case they have not be adequately provided for

Separated – same as spouse Extinguished if included as term of separation agreement Extinguished by divorce

Will Planning - Owing assets jointly Understand how joint ownership can affect will planning Joint tenants – owed jointly, passes to joint owner – outside the scope of a will Tenants in common – owned jointly, ability to alternative successor

Tax Planning Examples

Practical Example 1: Dwelling house exemption Scenario: Husband & Wife, 1 child 1 PPR €500,000, 2 Rentals €250,000 each Life assurance covers mortgage Opportunity for children to benefit from Dwelling House Exemption Preserving thresholds Legal right share - Right to family home in satisfaction of benefit

Example 1 - Outcome With dwelling house exemption Without dwelling house exemption Total inheritance by child (now & future) €1,000,000 Taxable inheritance €1,000,000 Lifetime exemption (€310,000) Net balance subject to tax €690,000 Taxable at 33% €227,700 Total inheritance by child (now & future) €1,000,000 Dwelling house exemption (€500,000) Taxable inheritance €500,000 Lifetime exemption (€310,000) Net balance subject to tax €190,000 Taxable at 33% €63,333

Practical Example 2: Agricultural Relief Parents, farm land & farm house €500,000, Cash €150,000, shares €25,000, Transfer all assets to child on death

Example 2 – Agricultural Relief No Agricultural Relief With tax planning (3 methods) Total inheritance by child €675,000 Taxable inheritance €675,000 Lifetime exemption (€310,000) Net balance subject to tax €365,000 Taxable at 33% €120,450 Total inheritance by child €675,000 Agricultural Relief 90% Taxable inheritance €67,500 Lifetime exemption (€310,000) Net balance subject to tax Nil Taxable at 33% Nil

Practical Example 3: Timing of transfers Parents 3 houses €250,000 each, cash €400,000, 2 children Intention gift house to each child first, gift cash later

Example 3 – Timing of transfers House first, cash after With tax planning (3 methods) House to child €250,000 Capital gains tax payable say €40,000 Net gift taken by child €210,000 Tax due now Nil Cash €200,000 Excess over threshold €100,000 Taxable at 33% €33,000 Cash to child €200,000 Net gift taken by child €200,000 Tax due now Nil House sold to child €250,000 CGT payable €40,000 Excess over threshold €100,000 Taxable at 33% €33,000 Offset of CGT (€40,000)

Practical Example 4: Newly formed company Assets owned Directors loan €400,000 (from sale of stock, machinery and entitlements) Dwelling house and farm €1,200,000 Company worth Nil Assets transferred equally to 2 children

Example 4 – Newly Formed Company Transfer of assets equally to children With tax planning Agricultural Relief not applicable Business Relief not applicable Net gift taken by child €800,000 Excess over threshold €490,000 Taxable at 33% €161,700 Each 1) Splitting of assets 2) Trust 3) Application toward agri-assets Net gift taken by child €800,000 Agricultural relief 90% Excess over threshold Nil Taxable at 33% Nil

Practical Example 5: Transfer of farm to nephew Assets owned Farm land €1,200,000 Nephew owns house €400,000 Residue of estate to niece Nephew separated & No agricultural relief

Example 5 – Transfer of farm to nephew With tax planning Agricultural Relief not applicable Business Relief not applicable Taxable inheritance €1,200,000 Excess over threshold €1,170,000 Taxable at 33% €386,100 + Exposure to future settlements Business Relief €38,610 Alternative to protect Life interest to Nephew + remainder to grand nephew

Practical Example 6: Retirement relief + Leasing Farmer over 55, 3 parcels Lease outside parcel 40 acres to rent near home Preserving RR

Example 6 – Retirement Relief + leasing Conacre Leasing + tax planning Rental income taxable Rental payments, an expense Sale of outside block taxable Purchase of new block liable to stamp duty Rental income exempt Rental payments, an expense Sale of outside block exempt Gift to child w.a.v. purchasing land YTF exemption

Thanks for your attention