Incorporating a Farming Business The Facts. Frank O Flynn and Robert Henson Partners Mason Hayes & Curran

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1 Incorporating a Farming Business The Facts Frank O Flynn and Robert Henson Partners Mason Hayes & Curran

2 About Mason Hayes & Curran Key areas of expertise include: Corporate Law Commercial Law Real Estate Tax Financial Services Litigation across a range of sectors including agrifood, energy, healthcare, technology and banking. We have long-standing relationships with ICMSA, Kerry Group and Donegal Creameries.

3 The facts of farming through a company Overview of body corporate and various roles of farmer in a corporate structure Tax and Non-Tax Advantages & Disadvantages Who suitable for / Who not suitable for If suitable, considerations on incorporation and corporate structure Succession planning Setting-up a farm company Duties and Responsibilities of directors Q&A

4 Farm Company Big decision Not for everyone Sole Trader v Company Company is a separate legal person Company becomes the farmer Farmer becomes shareholder, director, lender, landlord, employee Consideration for Sale Directors loan Access to trading profits Drawings Pension Contributions Leveraged finance, tax efficient borrowing

5 Farm Company Commercial Advantages Company has limited liability Ownership can be split between multiple shareholders Transfer of ownership interests can be easily effected Different rights and restrictions can attach to different ownership interests Ability to split legal and beneficial interest in shares Certain arrangements between shareholders can be kept private in a Shareholders Agreement Perpetual succession Succession planning - ability to handover value in company but retain control though different classes of share Floating charge

6 Farm Company Tax Advantages Profits accruing at 12.5% vs. up to 55% Flexibility as to level of salary/dividends taken Maximises monies earmarked for future investment and expansion 87.5% of profits can be available for reinvestment vs. 45% Ability to repay debt quicker and at lower tax rate - 50,000 capital repayment costs 57,142 through a company vs. 111,111 as individual Pension planning Various tax reliefs available to minimise tax impact on incorporation Transfer of Business Relief, Retirement Relief, Transfer at Tax Written Down Value Election Ability to extract funds over time at CGT rate of 33% rather than income tax of 55%

7 Farm Company - Commercial Disadvantages The farming business is no longer yours Significant governance and compliance obligations for Directors Corporate veil can be lifted Limited liability status can be negated by requirement for personal guarantees Another layer of paperwork Annual accounts to be filed - more onerous than for sole trader Filed accounts are publically available Accountancy and company secretarial fees Company s constitutions and annual return are publically available documents Onward sale buyers likely to want assets not company

8 Farm Company - Tax Disadvantages Additional tax administration Revision to previous year tax bill with cessation of trade Double charge to tax on sale Company and Individual levels If significant building capital allowances unused, may be preferential to retain in personal ownership but impacts CGT TOBR Stamp duty of 2% can arise on incorporation PRSI Employer s PRSI of 10.75% can arise but tax deductible by company and 1.75% saving vs. dividend route Close company surcharge on non-farming and passive income Personal losses forward cannot be used by the company Future eligibility for Agricultural Relief for CAT purposes Loss of Income Averaging

9 Considerations Influencing Incorporation Planning further expansion Looking at sustained and increasing profits Drawings are less than profits of farming business Asset Appreciation Stage and Availability of Personal Allowances Banking arrangements, if any Family circumstances, Succession Planning & Exit Strategy Upfront tax costs e.g. CGT at 33%, 2% stamp duty on land and goodwill values Pension Arrangements

10 If suitable, considerations on incorporation and corporate structure What assets are transferred? Are Land & Buildings Transferred Impact on CGT Reliefs Valuation of Goodwill and other assets Valuations need to be capable of standing up to Revenue scrutiny Consents required, if any Basic Payment Scheme Application & Entitlements Registration of herd numbers Customer, merchant and Co-Op notifications

11 Succession planning - Gifting Transfer of Farm/Shares in Farm Company to Child By Way of Gift Transferor Subject to CGT at 33% on deemed market value gain Availability of Retirement Relief Can be CGT Free Availability of Entrepreneur Relief CGT Rate of 20% on 1M lifetime limit Beneficiary Subject to CAT at 33% on gift element Availability of Agricultural or Business Property Relief Reduces Tax to 3.3% Tax Free Threshold - 310K Availability of Same Event Credit Stamp duty on transfer at 1% or 2% Young Trained Farmers Relief Relief on transfer of farming land where CGT Retirement Relief applies

12 CGT Retirement Relief Key Provisions Individual must be 55+ years at date of disposal dispose of a qualifying asset Have owned for the qualifying period If family transfer, no upper limit unless Farmer is 66+ years where upper limit of 3M applies If non-family transfer and individual under 66 years, full relief for sales proceeds up to 750,000. If sales proceeds exceed 750,000, CGT is capped at 50% of the difference between the sales proceeds and 750,000 If non-family transfer and individual 66+ years, full relief for sales proceeds up to 500,000. If sales proceeds exceed 500,000, CGT is capped at 50% of the difference between the sales proceeds and 500,000 Relief not automatic Must be claimed in income tax return No obligation to retire 6 year clawback period for disposals to a child assessed on child

13 Agricultural Relief Key Provisions Market Value of Agricultural Property on Gift/Inheritance is reduced by 90% where Beneficiary is a Farmer. A Famer is An individual in respect of whom at least 80% of his/her assets, after taking the gift/inheritance, consist of agricultural property and Who uses the property/assets for agricultural purposes for a period of at least 6 years or who leases out the agricultural property for not less than 6 years for agricultural use. Agricultural Property includes Agricultural land, pasture and woodland situated in the European Union; Crops, trees and underwood growing on such land; Farm buildings and dwelling houses (and the land on which they are situated) that are proportionate in size and character to the requirements of the farming activities; Farm machinery situated on such property; Livestock and bloodstock situated on such property; European Union single farm payment entitlements. Milk quotas where transferred together with agricultural land (Revenue practice) 6 year clawback period

14 Business Property Relief Key Provisions Market Value of Relevant Business Property on Gift/Inheritance is reduced by 90% where certain conditions are met. Relevant Business Property is a business i.e. the business of a sole trader an interest (i.e. share) in a business unquoted shares of a company carrying on a business provided that the beneficiary controls at least 25% of the voting rights of the company; Owns any percentage of the issued share capital of the company and controls (directly or with the family) that company; or At least 10% of the issued share capital of the company and has worked as a full-time director/employee of the company throughout the period of 5 years up to the date of gift/inheritance Businesses which consist wholly or mainly of dealing in currencies, securities, stock or shares, land or buildings or the making or holding of investments do not qualify 6 year clawback period

15 Succession planning - Inheritance Transfer of Farm/Shares in Farm Company to Child By Way of Inheritance Transferor Beneficiary No CGT Subject to CAT at 33% on inheritance Availability of Agricultural or Business Property Relief Reduces Tax to 3.3% Tax Free Threshold - 310K No Stamp duty on inheritance

16 Setting up a farm company Type of Company, LTD most suitable Process for setting-up Company Name Nominal value of share capital Director(s) Company secretary Registered office Initial shareholders Bank Account Company Secretarial services Accountant / Auditor Tax Registrations

17 Role and Responsibilities of directors What is a director Defacto directors Shadow directors I acknowledge that, as a director, I have legal duties and obligations imposed by the Companies Act, other statutes and at common law Common law and Statutory duties Fiduciary duties Statutory duties Companies Act 2014 Office Director of Corporate Enforcement

18 Q&A Frank O Flynn Robert Henson Mason Hayes & Curran t +353 (0) m +353 (0) e foflynn@mhc.ie Mason Hayes & Curran t +353 (0) m +353 (0) e rhenson@mhc.ie