We all keep our fingers crossed for a good harvest, but what happens when I farm in my own name and pass away before harvest time?
When a person passes away, his estate must be administered in accordance with the provisions of his will. The executor of the estate must ensure that the deceased’s liabilities are paid. However, this is not the full extent of the cost. The executor and other estate costs must also be paid, and then there are also taxes, such as capital gains tax, income tax and estate tax.
A harvest on land has a great influence on the costs in the estate if farming in one’s own name and if the farm is registered in the name of the deceased. The general rule is that a crop on land forms part of the value of the property on the same basis as other fixed assets, such as buildings. The value of the crop, therefore, has an impact on the valuation of the land in the estate. It is therefore essential that the property be valued as soon as possible after death because the value of the assets in the estate, as at the date of death, must be determined. The value of the farm plays an important role in the calculation of estate duty payable in an estate.
With regard to the question of whether a crop on land has an influence on capital gains tax, payable in the estate, the Income Tax Act stipulates that if a farmer should “sell/transfer” a crop (as part of the land or separately), it will be subject to income tax and not to capital gains tax. Remember that upon death, it is automatically deemed that all property is “sold/transferred” to the estate. In the absence of any agreement, the executor will have to make a division between the value of the land and the value of the crop as at the date of death. If the farm is bequeathed as an ongoing concern, there is an exception to the said rule, and the harvest does not have to be valued separately and will not be subject to income tax – it will then simply be part of the farm’s value-form and be of a capital nature[lp1].
Regarding income tax, the situation is also very unfavourable if you were to farm in your own name. The deceased’s income tax must be settled as at the date of death. This implies that the input costs of the harvest, which were incurred before the date of death, will be deductible in the final tax calculation as at the date of death and possibly cause a tax loss. The problem is that the estate, after the date of death, now becomes a new taxpayer and that the said “tax loss” may not be transferred to the estate. The crop collected after death thus becomes income after death, which in the estate will be subject to income tax and against which the input costs will not be able to be claimed as an expense. This result is that more income tax is payable.
If focus is on the tax implications at death, it seems that it will benefit many farmers to consider no longer farming in their own name. Two of the benefits of running a business are the following:
Continuity – because the company cannot die like a natural person, there is an opportunity[lp2] for succession planning so that the next generation does not need to start all over again and build a good credit history when dad passes away. Shares in the company can also be transferred gradually so that the transition to the next generation goes smoothly.
Taxes – the company offers an extra taxpayer, which in many cases is taxed at a lower rate than an individual, and there are concessions in the Income Tax Act, should a company, for example, qualify as a small business corporation. The negative income tax implications at the death of the farmer can also be managed and, in many cases, significantly reduced.
On the other hand, it is not always best to simply shift the entire farm to a company. Firstly, it can have large capital gains tax implications if, for example, you built the company from scratch and the company, at your death, has great value. It is also a fact that it is usually more expensive to exit a company structure if, for example, at some point, you would like to be making all the money. It is, therefore, necessary to find a favourable middle ground where a structure is practically and optimally put together from a tax point of view. There are methods and concessions in terms of the Income Tax Act that, while you are alive, allow you to structure your estate effectively so that a smooth transfer of ownership to your heirs, as well as taxes that are payable, are well organized. Proper estate planning is crucial. Feel free to talk to an expert in this regard.