Tax implications of share ownership fall into a number of categories. It pays to know them

Farmers for the most part have only incidental dealings with share transactions.

For the majority, their share portfolio comprises some co-op shares, and possibly PLC shares if a supplier to Glanbia or Kerry Group, Vodafone shares as a legacy from the Eircom buyout, and possibly a few FBD Insurance shares, or bank shares.

The tax implications of share ownership falls into a number of categories.

Dividends are taxed under income tax rules, with up to 55% income tax, PRSI and universal social charge being payable.

Some public companies allow a shareholder to reinvest their dividend towards buying additional shares, with no actual dividend received; instead the shareholder acquires additional shares.

The value of the dividend reinvested in shares is fully taxable for the shareholder, the same if the dividend was actually received. Revenue take the view that the reinvested dividends is merely the choice of the investor, and would look to collect their share of taxes in full from the shareholder in their tax return.

At some point in an individual’s life, their shareholding is either sold or transferred to the next generation. The sale of shares gives rise to capital gains tax — currently 33%, but this tax is payable only on the uplift in value beyond what the owner originally paid for the share.

If the shares were received by inheritance or gift, then capital gains tax usually only applies on the uplift in value beyond what the shares were originally valued at when acquired.

Revenue allow a mitigation against capital gains tax to take account of inflation since the shares were first acquired — this is known as indexation, and applies to shares acquired before 2003.

In some instances, normally involving PLCs, shares can be “spun out”. This happened in the case of Dairygold Co-op, where holders of Dairygold shares received shares in Reox Holdings. For tax purposes, the spinout doesn’t actually result in a tax liability. From the shareholder’s perspective, their combined new shareholding continues to comprise of the same basket of business assets.

However, when it comes to selling “spun out” shares, the tax rules get complicated. The cost of the original shares must be split between both classes of shares, to calculate the correct capital gains tax.

In some instances, companies undertake a share buyback. This happened in the case of FBD Holdings PLC. In short, this was a method of transferring value to shareholders, and was treated as a capital gains tax transaction rather than an income tax transaction.

The recent restructuring of Glanbia is also classed as a spinout involving a “paper for paper” exchange with shareholders. Existing co-op shareholders are to receive shares in Glanbia PLC in exchange for a reduction in the number of shares held by the co-op in the PLC.

It effectively gives shareholders an opportunityto unlock the value which they had tied up in the “unquoted” co-op shares, which can now be accessed through the sale of the “quoted” PLC shares.

Again, similar to the REOX scenario, shareholders would need to examine carefully the capital gain tax on any sale of their new shares, because it is likely that most shareholders will be regarded as having a very low cost of acquisition.

The gifting of shares to the next generation can also result in capital gains tax, even in cases where the shares are given for no consideration to the recipient. In the case of transactions between connected parties, capital gains tax is calculated on the market values rather than the actual money changing hands.

Shares in farmer co-operatives — such as Dairygold, Lakeland or the West Cork co-ops, for example — are not treated as “agricultural assets”, and therefore, transfers during the lifetime of a shareholder of shares are taxed under normal capital gains tax rules, with no exemptions or reliefs available.

Similarly for gift/inheritance tax, the shares are regarded as non-agricultural property, and neither business relief nor agricultural relief is available.

Looking forward, some co-operatives are suggesting that milk production be in some way tied to the shareholding of current producers, with the milk production type shares taking on some traits of the existing quota system.

Current tax reliefs covering capital gains tax, gift/inheritance tax, and stamp duty, as well as capital allowances, are all built around the quota system. However, the proposals to tie milk production to co-op shares, and with such shares not qualifying for capital gains tax or inheritance tax reliefs or even capital allowances, it is likely that this new form of quota will result in tax problems when the shares are acquired or transferred to the next generation of milk producers, especially if the value of the shares is significant.

From a tax planning perspective, it is important for shareholders to examine their own circumstances.