Selling a farm is the final stage in a farmer's life, often linked to retirement. There are a number of tax issues involved, and it's essential to understand them if you want to optimise your financial situation. Here are the main aspects to consider when selling a farm.
In this article, we focus mainly on the situation of farms that are subject to a system of taxation based on actual agricultural profits, rather than micro-BA or corporation tax.
The length of the last accounting period is a key factor to consider when selling a farm. A long financial year can have a significant impact on the taxation of profits.
Example: your financial year ends on 31 March and you stop farming on 31 December.
The following year's tax return will include :
Your taxable farm income will be very high (21 months including 2 CAP payment years), which will increase the income tax payable significantly.
Tip: Don't just calculate the impact in terms of income tax, but also take into account MSA social security contributions.
If you decide to postpone retirement until 31 January, income tax for the year in which you stop will be significantly reduced, as it will be calculated over 10 months (instead of 21 months). You will, however, have to pay MSA social security contributions for the additional year.
MSA social security contributions are not a tax, but there is one particularity worth mentioning about the consequences of ceasing to work.
Income from the last year of activity is never subject to social security contributions. Social security contributions are levied either on a three-year basis (average income for years N-1, N-2 and N-3) or on an annual basis (N-1).
Example: If you stop farming in 2025, you will pay social security contributions in 2025 on the average income for 2024, 2023 and 2022 or on the income for 2024 (if you opt for an annual base).
And in 2026, as you are no longer a farmer, you will not have to pay any MSA social security contributions. Income for 2025 is therefore not subject to contributions.
Tip: if you sell your farm to take over another agricultural structure, your income from the cessation of activity may then be subject to social security contributions. This is an important factor to take into account in your financial planning.
One of the major issues involved in selling a farm is the taxation of capital gains on the assets sold (buildings, equipment, facilities, etc.). Fortunately, there are a number of tax exemptions available to farmers under certain conditions.
Capital gains from business activities may be fully exempt from tax if the annual revenues (excluding VAT) generated during the two calendar years preceding the sale do not exceed €350,000 (article 151 septies of the General Tax Code).
Above this threshold, and between €350,000 and €450,000, the exemption is partial and degressive.
This provision applies to the calculation of income tax, social security contributions and MSA social security contributions, and is not solely linked to the cessation of activity.
Example: A farmer whose average income over the last two years was €330,000 will be entitled to full exemption from capital gains tax when he sells his farm.
For retiring farmers (article 151 septies A of the CGI), there is a specific capital gains exemption scheme: the seller must cease to hold any position in the business or company and claim retirement within two years of or before the sale.
Capital gains realised on the transfer of a sole proprietorship or an entire branch of business may qualify for partial or total exemption from income tax (article 238 quindecies of the General Tax Code).
Since the Finance Act for 2022, to qualify for a total exemption, the value of the items sold must not exceed €500,000, and above that amount, up to €1 million, a partial exemption may apply.
Please note that this system only applies to capital gains made on movable property, not on property assets.
If you are a sole trader, you can choose whether or not to include the land on your balance sheet.
For property assets that are not included on the company's balance sheet, the capital gains tax regime for private individuals applies, with total exemption from tax after 22 years‘ ownership and exemption from social security contributions after 30 years’ ownership.
This regime can be more or less advantageous depending on your situation and whether you wish to sell or rent.
Tip: Make sure you meet all the conditions required to benefit from these special schemes, particularly in terms of length of time in business and compliance with the time limits between leaving the business and actually retiring.
When a business is sold, certain tax measures used previously may be added back or adjusted, thus impacting taxable income in the year of sale.
By opting for the three-year average tax rate, income tax is calculated on farm profits for the last 3 years. This makes it possible to smooth out farm income and avoid climbing up the tax brackets on the tax scale (progressive tax rate).
In the last year of taxation under this scheme, tax will be calculated on the average of the last 3 years. Additional tax will be calculated on the difference between the last year's income and the three-year average, and will be subject to the marginal rate of tax.
Example: The income for the last year is €100,000 and the income for the 2 previous years is €25,000.
|
|
Annual Income |
Three-Year average |
Income Taxu |
Marginal Tax Rate |
|
Year Y |
100 000 € |
50 000 € |
8 286 € |
30% |
|
Year Y-1 |
25 000 € |
|||
|
Year Y-2 |
25 000 € |
Sur cette base, l'imposition pour un célibataire sera de 8 286 € (16,572% de taux moyen) avec un taux marginal (le taux le plus haut appliqué) de 30%.
Un complément de taxation sera appelé sur l’écart entre le revenu de l’année et la moyenne triennale :
|
|
Annual Income |
Three-Year average |
Difference |
Marginal Tax Rate |
Tax supplement |
|
Year Y |
100 000 € |
50 000 € |
50 000 € |
30% |
15 000 € |
The total tax payable will therefore be €23,286.
This is still less than the tax that would be calculated on an income of €100,000 (€25,229).
The DEP is a system that allows farmers to deduct part of their profits each year to cover future contingencies. If the farm is sold, any sums not yet used must be added back to the profit for the year in which the sale takes place.
Example: A farmer who has built up a DEP of €30,000 over the last few years and has only used €10,000 will have to add back €20,000 to his taxable income when he sells his farm.
Tip: Anticipate the reintegration of the DEP by planning its use in the years preceding the sale of the farm.
In principle, the sale of farm assets should be subject to VAT (Value Added Tax).
However, the sale may be exempt from taxation in the case of a total sale of the business or of a complete branch of activity (article 257 bis of the General Tax Code). In order to benefit from this exemption, the purchaser must undertake to make any subsequent adjustments.
If you sell buildings on which you have deducted VAT for less than 20 years and you sell them to a purchaser who is not liable for VAT, you will have to pay back a proportion of the original VAT.
Example: You built a building for €200,000 in 2012. The VAT refunded by the tax authorities on this building was €24,000. You sell the building in 2025. You will therefore have to repay 6/20ths of the initial VAT (because you will have used it over 14 years from 2012 to 2025), i.e. €7,200.
If your buyer is liable for VAT, there is a system that allows you to defer this commitment for 20 years and therefore avoid making this repayment.
The sale of a business generally involves the transfer of inventories, either to the buyer or to third parties, which may generate a taxable profit if the inventories are valued at less than their sale price. It is important to value these inventories correctly and to take account of their tax impact.
Tip: Consider the possibility of gradually reducing your inventories in the years leading up to the sale to minimise the tax impact. Be careful, however, to factor in the social impact of these sales.
For transfers free of charge (gift or inheritance), the Dutreil agreement allows you to benefit from a 75% allowance on the value of the assets transferred. This scheme can be particularly attractive in the case of a family business transfer.
Rural law is complex, and so is agricultural taxation, for which the Code Général des Impôts (General Tax Code) provides a number of special provisions. In the case of the sale of a farm, the situation is therefore particularly complex from a tax point of view.
It is strongly recommended that you seek the assistance of a chartered accountant or tax specialist specialising in agriculture to optimise your situation and avoid the tax pitfalls. Good anticipation and careful planning will significantly reduce the tax payable on the sale.
Here are some additional resources we have put at your disposal to provide you with all the information you need for your transfer project.
