There are two sides to every story and the most recent budget commentaries advocating the benefits of farm partnerships fail to highlight significantly the potential downside and vital need to look beyond the Income Tax and Schemes’ benefits.
A written partnership agreement is essential and the fact that an agreement has to be written down forces families into having a discussion about succession. This gives clarity on what both parties want and expect to happen over time.
It formalises an agreement regarding wages, division of profits, the level of labour expected by each and how to deal with any disputes which may arise. It is imperative to seek sound legal and tax advice at the beginning of the process as the law of governing partnerships is 125 years old.
The upside – potential benefits of farm partnership structures
Helping the succession process
A properly constituted partnership can be an excellent arrangement within a family, keeping both the younger and older generations involved in the orderly transfer of the farming business over time.
Better lifestyle is the big positive that all participants highlight. There is a huge advantage in being able to take time off, whether it’s regular weekends or days off or the flexibility of being able to take holidays. This is further enhanced with reduced stress when you are away, knowing that the person at home is as invested and capable as yourself.
Labour availability on farms continually comes up as an issue. There is huge duplication where two farmers are milking two herds of 60 cows. Other benefits include reduced isolation, a greater skills mix and better decision-making. Having to justify decisions to eachother means they are fully debated.
Economies of Scale
Financial incentives include the potential to increase scale by joining two milking platforms or concentrating the cows on one block and the replacements on another. Improved efficiencies and savings will also allow for a greater financial return for the farmers involved, resulting from one larger unit replacing the two smaller enterprises.
Revenue and the Department of Agriculture have a favourable approach towards registered farm partnerships. The lower tax rate can be maximised by sharing the profits. 100 per cent stock relief is available for new young trained farmer entrants, while 50% stock relief is available for other partners. This can be significant if stock numbers are increasing.
There is also a 25% Basic Payment Scheme top-up and access to a 60% grant rate for young farmers. Where three partners are involved there is a trebling of the grant investment ceiling.
Other benefits include:
• Qualifying for increased thresholds under TAMS II – doubling of the €80,000 TAMS II investment ceiling
• Qualifying a young trained farmer for a BPS 20% Top-up and/or National Reserve
• Provide potential for 50% grant on new partnership set-up advisory costs (up to €5,000 costs)
• Make available valuable income and capital taxes’ partnership reliefs
• Qualifying for the €5,000 five-year registered farm succession partnership Income Tax Credit
The downside – examples of potential traps
Registered owner of land not the owner
Property purchased on behalf of the partnership business is deemed to be held on trust for all the partners. The registered owner is therefore not the owner – the partnership is the owner. Unintended and disastrous consequences of this can be:
Wills making reference to the land, stock and buildings passing to the farm successor rather than the individuals’ share in the partnership may result in:
• Land, stock buildings, etc. not passing to the intended person
• Potential loss of valuable 90% Agricultural Value Relief on the inheritance, which could mean an Inheritance Tax bill of up to €380,000 on a well-stocked 100 acre dairy farm
• Ownership uncertainty leading to family discord and expensive legal actions
• Fragmentation of land to pay the tax and legal bills
• Disruption or disintegration of the family farm business
Land jointly owned – a tax timebomb
Joint ownership of land is a tax and legal minefield. The Capital Gains Tax Relief available to partnerships on breaking of land owning joint tenancies was discontinued on 31st December 2013. Splitting the jointly-owned lands into the individual partners’ names makes both partners liable to Capital Gains Tax, exposing them to unplanned and unexpected tax bills.
Forced cessation of partnership – additional Income Tax bills
Where one of the existing partners in a two-partner partnership dies, the partnership is deemed to cease, thereby giving the option to the tax office to revise some of the previous tax years if profits were increasing, resulting in increased Income Tax bills.
Entering partnerships unknowingly – “joint herd number partnerships”
There is strong legal advice supporting the opinion that farmers who created “joint herd number” structures in order to qualify for the 2015 National Reserve and Young Farmers Scheme unknowingly created and entered into partnerships. Without having received legal and tax advice, this could expose them to the potential traps outlined above.
Properly formulated partnerships have proven very successful in Ireland. However partnerships are not for everyone and the financial incentives alone are not reason enough to create a partnership. Having decided to go into partnership negotiations can then take up to a year. This planning stage is hugely important and having a well-prepared exit strategy may mean that you may never have to use it.
It is imperative to seek sound legal and tax advice at the outset.
Tommy Fallon, Branch Manager, IFAC Accountants, Roscommon