Now that the deadline for submitting your single farm payment application has passed, it’s an ideal time to double check that all is in order in relation to single farm payment entitlement purchases and sales.
Each year, entitlements are transferred by sale, lease, gift and inheritance. If you have been either a seller or disposer or recipient, then it’s worthwhile checking out the implications from a tax point of view. Entitlements can only be transferred to a person who has obtained a herd number. It is common for a parent to transfer their herd number to their son or daughter as part of transferring the family farm, however you should note that entitlements don’t automatically transfer with a herd number. Therefore, in these situations, it is necessary to complete a transfer form. The same procedure applies in the case of farmers who change their herd number from a sole name to joint husband and wife names. The transfer form is available from the Department of Agriculture.
Agricultural advisers are normally pretty clued up on completing these forms.
In the case of purchases from third parties, it is worthwhile ensuring that the seller actually does own entitlements, and does have the right or ability to sell these. After all, there are no physical goods which you can view before buying — you are effectively buying a declaration by a seller.
For this reason, it is best to purchase entitlements from reputable persons, and ideally with a well drafted contract.
On the tax side, the transfer of entitlements has a number of tax implications, depending on the circumstances involved.
From a tax deductibility point of view, the purchase of entitlements is a bit of a disaster — there is no tax deduction or capital allowance available for the purchase of entitlements, and the income coming from the entitlements is fully taxable.
Where entitlements are leased together with land which is leased under one of the tax exemption schemes, the portion of lease income in respect of the entitlements can also qualify for an exemption from income tax, subject to the overall tax free limits. However, do remember that Universal Social Charge and PRSI still apply.
The outright sale of entitlements to a third party is a capital gains tax event. Most people acquired their entitlements for no cost in 2005 as result of farming in the reference years. The sale of these “original” entitlements normally gives rise to a tax bill amounting to 30% of the value involved.
Where entitlements were previously bought and are now sold, the difference between the costs and the sales proceeds is normally subject to capital gains tax at 30%. An exemption from capital gains tax can apply in the situation where a farmer passes on the farm to his or her son or daughter, if they are transferred at the same time and to the same person as the transfer of land — but this is also dependent on some other conditions.
As regards stamp duty, the sale or purchase of entitlements is exempt from stamp duty.
Where a farmer sells an amount of entitlements in any 12-month period at a total price of more than €37,500, then the sale of entitlements is subject to VAT. The farmer is obliged to register of his/her own accord, and pay the VAT to Revenue. The only exception to this rule is the transfer of entitlements by way of gift — for example, a transfer by gift from a parent to a child.
The sale of entitlements with land can be subject to VAT also. The purchaser of entitlements can reclaim the VAT if they are VAT-registered. The rate of VAT that can apply in the above circumstances is 23%.
As always, each individual’s circumstances should be looked at for the best advice. Your questions on this and other farming tax issues are welcome.
© Irish Examiner Ltd. All rights reserved