Farm Finance: Storm damage and insurance options - what you need to know
Where buildings or machinery are underinsured, farmers can be surprised to learn that a payout is proportionately reduced, writes rural accountant Kieran Coughlan.
Over the past couple of weeks, some farmers will have experienced damage as a result of stormy weather. Those lucky enough to have insurance may be in a position to make a claim for storm damage.
There is a variety of insurance covers which can apply, but the more popular insurance cover on farms would include farm building storm damage, stock loss, which can cover animals, straw or fodder, and damage to tractors and implements.
When it comes to insurance claims, a starting point in all instances is to contact your insurer and to check your policy documents to see what cover you have.
If you have cover, your insurer will usually send their own assessor to take a look at the damage and to prepare a report for the insurance company, which they will use to work out the amount of insurance pay out to you.
Where buildings or machinery are underinsured, farmers can be surprised to learn that a payout is proportionately reduced.
Take for example a farm building is insured for €80,000 for storm cover. The actual rebuild costs for the building is €160,000 and the farmer didn’t update their insurance cover for this amount prior to the storm damage. Say the roof damage has been assessed as costing €30,000 to repair.
As the building was underinsured, the insurance company may only pay out €15,000, even though the farm thought it had cover for €80,000.
Sometimes farmers can also find themselves uninsured even where they have storm cover for certain buildings, where there have been additions or extensions to the farm buildings, and these “new” sheds are specifically mentioned on the farm policy.
Other times farmers can find themselves uninsured where the farm building is deemed not to have been maintained in good order, this can be the case where the shed trusses and timbers had become rotten and the insurance company deem the damage to have been inevitable.
In these trickier circumstances, farmers would be well advised to employ their own insurance assessor to both help them understand the process, help them to negotiate with their insurance company and give peace of mind through a professional third party that what they are being told or offered seems fair.
From a tax perspective, there are a number of different tax implications depending on whether an asset is lost or destroyed or partially damaged and whether the farmer expends the insurance proceeds on repairing or replacing the asset or decides to pocket the insurance money for other purposes.
Where insurance payout is in respect of loss of earnings or damages to stock, then this would point to an income receipt and the insurance income would form part of the taxable profits for income taxes for the year.
Compensation payable for the destruction or damage to a capital asset of the business, such as a building, would be regarded as a capital receipt liable to capital gains tax.
However, a deferment of the charge to capital gains tax can happen in a couple of instances.
Where the asset is partially damaged and compensation is received a farmer can choose to defer capital gains tax on the receipt of insurance money by instead treating the historical cost of the asset as having been reduced by an equivalent amount meaning that any future sale will pickup the fact that the insurance proceeds have already used those costs.
Where an asset is lost or destroyed and any capital sum received in compensation or under an insurance policy is used in replacing the asset, the owner may claim to be treated as if effectively the new asset takes on the tax cost of the original asset. The capital sum must be used to replace the asset within 1 year of the receipt of the insurance.
Lastly, where an asset is lost or destroyed and the proceeds are only partially reinvested, then a farmer can choose to effectively only face exposure to capital gains tax on the part not reinvested. For each option outlined above a farmer must make a relevant election or the default position is that capital gains tax would be calculated in the normal manner.
The above points are fairly technical in nature, but the key message is that where compensation is received, it is worthwhile discussing with a specialist tax advisor what the best course of action is to limit tax exposure. As with all tax matters, persons should obtain professional tax advice relevant to their own specific circumstances.
