Taxes on Transferring your Business or Farm - Part 1

 No one can run their business forever. Eventually, either through gift, inheritance, or sale, your business or farm will need to be transferred to someone else. In this part 1 of this two part series, we look at things from the receiver's point of view. If a person receives a gift or inheritance, they will be liable to Capital Acquisitions Tax (CAT) at 33% on the value of what's received. This can be a very severe tax. In this weeks post, we will examine this tax in detail, look at some of the reliefs available to you,  and explain what you can start doing now to best plan for this tax in the future. 

Capital Acquisitions Tax (CAT)
More commonly referred to as 'gift tax' or 'inheritance tax', CAT is levied on a person who receives anything as a gift, inheritance, or as a disposal from a trust. Essentially, anything you get for nothing falls within the scope of this tax. There are thresholds below which you don't have to pay the tax from certain relatives. Put simply, group A relatives are parents, and the CAT threshold on a gift from them is €335,000. Group B are siblings, nieces/nephews, grandparents, or your child if the gift is coming from child to parent. The group B threshold is €32,500. Group C is essentially anyone else, and that threshold is €16,250. The value is deemed to be the market value of the gift/inheritance. Therefore, even with the group thresholds, significant liabilities can arise on the transfer of a business or farm. For example, if you receive a farm from your father with a market value of €1,000,000 , yes you get your €335,000 threshold tax free, but you are still liable to €219,450 CAT on the balance. Furthermore, as I mentioned earlier this tax is levied on the 'market value' of the gift/inheritance, which when you're dealing with a business can be surprisingly high as it includes a figure for goodwill, which can be difficult to estimate for a small business. There are methods to reduce the exposure to this tax for businesses and farm, I will now explain this for each. 

Business Relief from CAT
Sections 90 to 101 of the Tax Consolidation Act 2003 provide for a relief from CAT on the receipt of a family business. How the relief operates is it reduces the market value of the business by 90%. For example, if you inherit a business valued at €1,000,000 , the value for CAT purposes can be reduced to €100,000. This is therefore a very lucrative relief. There are several conditions which must be satisfied however, and these are things which you should start working on now to ensure that they are met by the time the transfer takes place. Below we work through the key conditions, along with guidance on applying them to your situation. 

The first and most important condition is that all of the gift/inheritance must be made up of 'Relevant Business Assets'. These are defined as follows. In the case of a sole trade, it means property or any assets used in the business, e.g. goodwill, debtors, trading stocks, etc. This is important to note as if you are transferring the business premises alone, and not as part of transferring a business, then the relief will not be available. If planning to transfer a business premises in the future, it could be beneficial now to ensure that a business that can be transferred is being operated from it, so as the recipient can avail of the relief.

Another heading which a business premises could fall under that would allow relief to be claimed is assets which 'were used wholly or mainly for the purpose of a business', provided that this business is also being transferred to the recipient. Basically, this means that if transferring a Company and also it's premises which it rented but did not own, the premises is brought into the scope of business relief for CAT purposes. Shares of trading companies are treated as qualifying business assets. If the Company is an investment vehicle or rental Company, then the relief will not apply.

The person making the gift (the disponer) must have owned the business assets for 5 years. This can be reduced to 2 years in the case of an inheritance. If the disponer himself inherited the business from his spouse previously, the amount of time that she owned it can be used here it making up the 5 years. 

Finally, there is a clawback period of 6 years after the relief is claimed. What this means is that if the relevant business property no longer meets the criteria during the 6 years after the gift/inheritance, the relief originally granted is withdrawn. The same applies if the recipient sells the property within the 6 year period. 

Agricultural Relief
Similar to business relief, this relief acts by reducing the value of agricultural property by 90%. It was introduced in 2003 in order to reduce the burden of CAT when the family farm is passed on to the next generation. As I mentioned, the mathematics of the relief operate exactly the same as business relief above. A key factor, however, is that agricultural relief cannot be applied to Company shares, regardless whether or not the Company operates a farm. This is vital information for planning around a farming Company. The Company shares may qualify for business relief, but there is one significant benefit to agricultural relief for a farm of land; the farmhouse can be included. For business relief, private dwellings can never qualify for relief. Therefore, if a farmhouse exists, it's far more beneficial to claim agricultural relief as opposed to business relief. This can be a key planning factor in terms of transferring farmland into a Company, for CAT purposes this is almost never a good idea. Furthermore, it could even be beneficial to remove a farming trade from a Company altogether before a transfer, as there are no minimum periods of ownership for the disponer with agricultural relief. I will now explain some of the criteria for agricultural relief. While similar to business relief, there are some significant differences. 

As you would expect, the assets being transferred must be 'Agricultural Property'. Revenue define this as; agricultural land, crops & trees growing on that land, farm buildings, farm machinery and any payment entitlements from the department of agriculture or EU single farm payment scheme. Land held in a Company is not deemed agricultural land for this relief, therefore as I mentioned above, it will only attract business relief. 

The recipient must also pass something which Revenue call 'The Farmer Test'. In order to qualify here, at least 80% of their assets (at market value) must be made up of Agricultural Property as defined above. There are four key points to note here:
1. The test is applied after the gift/inheritance. Therefore, the value of the property being received is included as Agricultural Assets for this test. 
2. The legislation states that the test is applied at 'the valuation date', not the date of the legal transfer. As in most cases the valuation date can be planned for, this allows scope for the recipient to re-arrange their assets in such a way as to pass the 80% test on that date. 
3. The legislation also provides that the gross value of assets can be reduced by a loan secured on an off-farm dwelling. This loan must be used for the purchase, improvement or repair of that house. As mentioned in point three, this could be a key action point between the transfer date and the valuation date. 
4. Finally, the farmer test is not applied to gifts/inheritances of standing timber. In simple terms, any person regardless of their mix of assets is entitled to agricultural relief on standing trees. This does not apply however, to the land on which the trees are growing. 

The other test which Revenue have devised for this relief is what's known as the 'Active Farmer Test'. This test requires that the recipient must actually farm the agricultural property for at least 6 years after the gift/inheritance, or lease it to an active farmer who will farm it for the same period. Additionally, the recipient (or person who leases the land) must hold an agricultural qualification or farm the property for not less than 50% of their 'normal working time'. 

Finally, agricultural relief may apply to a gift/inheritance where it was stipulated as part of the transfer that it be invested in agricultural property. If this is the case, it's then treated as agricultural property for CAT purposes.  Similar to business relief, there is a 6 year clawback period. 

An interesting planning point where inheritances comprise a mix of agricultural and non-agricultural property would be arranging the will in such a way as to establish a discretionary trust for all of the assets. This would allow the trustees to essentially give out the agricultural assets first, ensuring that the 'Farmer Test' is passed on the valuation date, and then giving out the rest of the assets afterwards. 

As always, I'd like to thank you for taking the time to read, and I hope it has been of value. Be sure to watch out for next weeks post, where we take a look at Capital Gains Tax implications for business transfers.  If you'd like to get in touch with any questions, or to learn more about Capital Acquisitions Tax, please do not hesitate to leave a comment below, or reach out to us at [email protected] .

Be advised that the information provided in this blog post is for general informational purposes only and does not constitute legal or tax advice. While we strive to ensure the accuracy and completeness of the content, it should not be relied upon as a substitute for advice tailored to your specific situation. We are happy to provide this should you require assistance on any of the matters outlined above.