Watch out for tax on insurance proceeds
Many farmers, rural dwellers and even some townies were caught outby ex-hurricane Ophelia, a few weeks back.
Yours truly was left with the lights out for six days, with others were affected for up to 10 days.
Undoubtedly, Trojan work was done by the ESB and their contractors, some from France, Scotland and Northern Ireland, in getting power restored.
And farmers and other local people did massive work in getting roads cleared of fallen trees, debris and blocked drains.
Many farmyards, particularly in Co Cork, Kerry and Waterford, were left in a battered state, with sheds and farm buildings stripped of galvanised iron, and in some instance left in a twisted mess.
Farmhouses have been damaged too. While many farmhouses will be covered under dwelling house policies, the position is that storm damage cover on farm buildings is much more scant.
Many insurance assessors around the country have been removing farm buildings from cover, where there are visible signs of rust, in recent years.
Within my own farm yard, one such building was excluded from cover, it is ironic that these buildings most in need of insurance cover are in many instances precluded from such cover.
But it’s not surprising that insurance companies wish to maximise insurance premium income while simultaneously removing risk from their books.
For those lucky enough to have insurance cover, but unlucky enough to have incurred damage, the battle at hand will involve agreement of a settlement figure with the insurance company.
As a starting point, it would be worthwhile getting written quotes from at least two reputable farm builders to reinstate the sheds.
Ensure that such quotes include all materials such as sheet metal, purlins, guttering, nails, screws, washers, bolts, clear lights, hire of hoists and equipment.
For your own benefit, the quotes should be valid for at least six months, and should specify when the work is to commence and conclude.
Armed with the quotes, you should present these to your insurance company for reimbursement.
The insurance company will of course appoint their own assessor to firstly check whether the shed in question was covered, secondly to establish whether adequate insurance was in place (that is, that the shed was not under insured), and thirdly to financially assess the level of damage.
Where all parties agree to the level of compensation, there is no issue.
Where the level of compensation falls short of your expectation, you may need to appoint your own independent insurance assessor, and obtain relevant legal advice.
When it comes to taxation, the receipt of insurance compensation can be a bit tricky.
From an income tax perspective, the receipt of insurance proceeds can be treated as giving rise to a balancing charge.
This means a farmer could be liable for income tax on insurance proceeds after the destruction of plant or machinery, no different from any other trading receipt, with this more especially being the case where the farmer ceases to trade.
Aside from the more unusual scenario where insurance proceeds are considered for income tax, insurance proceeds for damage to property are more typically regarded as a capital gain.
Working out the amount of capital gains tax payable is complicated, and dependent on a number of factors.
The proceeds can be treated as the disposal of an asset, with a resultant capital gain worked out principally based on the differential between the amount of insurance and cost of the asset.
Obviously, a farmer in receipt of a lump of insurance would rather not pay capital gains tax on that insurance money, where the proceeds are to be reinvested into a repair or replacement. Luckily, the tax legislation provides that a taxpayer can elect to effectively roll over the gain on insurance monies, where the proceeds are reinvested in replacing the assets.
In the event that the insurance proceeds are only partially reinvested, capital gains tax could be payable on the amount not re-invested.
Where there is a delay in receiving insurance, and costs are incurred in the interim on a repair or restoration, the option to avoid paying capital gains tax could be lost. Where an individual expects to be in receipt of insurance proceeds, it is critically important to obtain professional tax advice to ensure that taxation of same is minimised.
Lucky for me, my rusty 60-years-old shed withstood the Ophelia battering unscathed.
