Beware the pitfalls of switching to joint farm ownership

On why it’s not always financially beneficial to transfer a farm into both names

IT is not uncommon for farming spouses to decide to place all or part of the family farm in joint names. This can be done for a number of reasons. Sometimes it is motivated by a gesture towards spousal equality; sometimes it is for tax-related reasons; and sometimes for no particular reason at all other than that it was considered a good thing to do at that point in time.

I have no difficulty with inter-spousal transfers per se provided that such transfers take account of all of the taxation and state benefit consequences.

However, transfers that are done without due consideration of any future consequences can lead to possible problems down the line.

CAPITAL GAINS TAX

Where there is a possibility of a future sale of land, placing land in joint names before the landowner reaches 55 years can potentially have significant benefits if both spouses have owned and farmed the land for ten years or more before any sale or transfer.

A farmer over 55 can dispose of up to €750,000 worth of land free of Capital Gains Tax subject to certain conditions. This is known as Retirement Relief and is available to both spouses once they can show that they have owned and farmed the land for 10 years. If a sale is on the cards and the anticipated sale proceeds are likely to exceed €750,000, a timely transfer into joint names could result in substantial tax savings.

However, if that farmer had transferred his land into joint names with his wife after his 55th birthday he will have lost his Retirement Relief exemption to the extent of the value of the land transferred or €750,000, whichever is the lesser.

If they subsequently decide to dispose of part or all of that land, the wife will need to show that she has owned and farmed the land for 10 years in order for her half-share to qualify for Retirement Relief.

The message is, if considering a transfer into joint names, do it before you are 55 and ideally well before then, and only do it where it will be possible to show that the wife was clearly involved in farming the land for ten years prior to any sale or transfer.

STATE PENSION CONSIDERATIONS

In the context of State Pensions there is generally no compelling reason to transfer as it is not necessary for a farm to be in joint names for both spouses to be eligible for a full contributory pension.

One of the more common problems I encounter is where a farm has been placed in joint names but the farm accounts remain solely in the husband’s name, so his spouse has no Class S PRSI credits and only discovers this fact when she is over 66 — at which point it is too late to do anything about it.

In most situations where the land is in the farmer’s sole name, his wife will qualify for the Qualified Adult Allowance if she is not otherwise entitled to any pension or benefit or has no significant income or means.

However, in cases where the land is in joint names, the wife may find that she is not eligible for the Qualified Adult Allowance because of her half-share in the farm, nor is she eligible for a pension in her own right because she has no Class S contributions established before she reached 66.

The important message if you are not sure of your PRSI contribution status is to check your PRSI contributions history, which can be requested on line by visiting www.mywelfare.ie.

Another common problem I encounter is where the farm accounts and possibly the land were put in joint names in order for both spouses to qualify for full contributory pensions.

It was not necessary to transfer the land but they did it anyway as they felt it would help secure the pension. In such cases where the husband is somewhat older than the wife (or vice versa where the wife is the land-owning spouse) there may be a considerable loss of income by opting to have both spouses seek a full pension as the period while the wife is awaiting her pension could prove costly.

Had the situation been properly thought through it might have been more beneficial if the farm was never transferred and the farm accounts had been left in the husband’s sole name, as the wife would have received the Qualified Adult Allowance from the day her husband received his pension.

The bigger the age gap the bigger the loss. The case study ( inset) illustrates the point.

Martin O’Sullivan is the author of the ACA Farmers Handbook.

He is a partner in O’Sullivan Malone and Company, accountants and registered auditors;