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Agri land purchase - efficient tax structure

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  • 04-04-2021 9:57am
    #1
    PaidV
    Registered Users Posts: 71 ✭✭


    Hi all, I was hoping ye could shed some light on a query for me. I am in a farm partnership with my parents, my father runs the farm while I work full time away from the farm. We are looking at purchasing a holding of circa 50 acres locally borrowing the majority of the funds.

    My off farm income would be well into the higher tax bracket so is there anything we can do to efficiently use this purchase to manage my off farm income from a tax perspective.

    I was thinking if we set up a limited company, borrowed through this company and purchased the land through this company and the company then leased the land to the partnership at a rental rate that put the partnership in a loss position then I could offset my share of the loss against my off farm income? And the corporation tax on the rental income would only be at 12.5% so I'd be getting a nice net income tax refund every year?

    Any thoughts or suggestions based on your experience would be welcome!

    Thanks
    Padraig


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    #2
    duffysfarm
    Registered Users Posts: 846 ✭✭✭duffysfarm


    Corp tax is 25% on rental income
    You then have closed company surcharge on undistributed profits which brings up the tax rate to close to 40% on rental income when received by company

    Buying land is not tax efficient
    PaidV wrote: »
    Hi all, I was hoping ye could shed some light on a query for me. I am in a farm partnership with my parents, my father runs the farm while I work full time away from the farm. We are looking at purchasing a holding of circa 50 acres locally borrowing the majority of the funds.

    My off farm income would be well into the higher tax bracket so is there anything we can do to efficiently use this purchase to manage my off farm income from a tax perspective.

    I was thinking if we set up a limited company, borrowed through this company and purchased the land through this company and the company then leased the land to the partnership at a rental rate that put the partnership in a loss position then I could offset my share of the loss against my off farm income? And the corporation tax on the rental income would only be at 12.5% so I'd be getting a nice net income tax refund every year?

    Any thoughts or suggestions based on your experience would be welcome!

    Thanks
    Padraig


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    #3
    sob1467
    Registered Users Posts: 777 ✭✭✭sob1467


    I do not think it would be wise to setting up a company, just because of tax to lease land.

    There are some advantages, like the interest borrowed on the land could be used as an allowable expense against the lease income. This could not be done if not held in a company. However I think the cons of a company way outweigh the positives.

    However as the earlier poster said operating through a corporation tax of 25% on all rental income less allowable expenses, in addition to this there is also a company surcharge of 15% on income that is not distributed out of companies within a year and a half. This would bring the tax on the company's profits to 40%.

    Then you will also be paying income tax on those profits being distributed out to yourself/parents. You state you are already on the higher tax rate, so you could be talking another 48% on those profits again.

    Operating through a company also sometimes give rise to two charges of tax. In the case of operating through a company and selling the farm at a profit the company would pay chargeable gains of 33% on any gain.

    So for example in ten years the farm is now worth 200k having paid 50k for it. Company's chargeable gains tax at 33% is chargable on the gain so 49,500. This leaves 150,500 in the company.

    To get this 150,500 out of the company you have to sell your shares in the company for 150,500 less the cost of your investment 50,000, this leaves another gain of 100,500 on which personal CGT of 33% is payable so this leaves you with (100,500*33%) 33,165 tax to pay and leaves you with only 67,335.

    Compare this to if you own the land yourself (Gain: 200k-50k = 150k) you pay (150k*33%) 45k capital gains tax, and this would leave you with (200k-45k) 155k.

    That is a big difference, that is very often overlooked by people who do not know tax.

    An easier way to operate it from a tax perspective would be to buy the farmland as an individual and use the leasing farmland relief. This is effectively a full relief from income tax on a long-term lease of farmland. The lease has to be over five years in duration. There are maximum amounts of relief available depending on how long you lease the land for think it is about 18k to 40k per year free of income tax. I think this is a much better option than going down the company route.

    I wouldn't go basing your whole opinion totally on tax advice though. Farmland seems very expensive at the minute, and although bank loans are low, you also would not be able to offset this against rental income as an individual.


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