Inheritance tax changes when will bring more small farms into tax net when land is transferred

LAST week, we looked at how there has been a massive increase in the rate of inheritance tax over the past two years.

Based on a simple example of a transfer of €600,000 of cash from parent to child, the increase in inheritance tax has been €93,509.

I mentioned previously that there are two other specific reliefs which augment the calculations, where there is a transfer of land.

The reliefs are known as “Agricultural Relief” or “Business Relief”. Both of these reliefs grant a 90% reduction for tax purposes in the value of the property being transferred, before the tax rate is applied.

For example, the transfer of a farm worth €2m can be tax exempt, if a child can avail of agricultural relief or business relief.

This is best explained in the following example.

One of the conditions for qualifying for Agricultural Relief is that the individual does not own non-agricultural-property with a value of more than 25% of the value of the farm they are inheriting. So, for the child inheriting a farm worth €2m, if all other conditions are satisfied the child can avail of Agricultural Relief if they do not have other non-agricultural assets worth more than €500,000. This is a pretty easy test to pass where the value of a farm is €2m. However, if the farm value is only €600,000, for example, a child may not be able to pass this test if they have, for example, their own home which they have paid for, or an investment property, or other assets worth more than €150,000 in total.

Where a child is unable to pass this asset test, it is possible to check if an alternative relief called “Business Relief” will apply.

The only similarity between Agricultural Relief and Business Relief is that Business Relief also grants a 90% reduction in the value of the property, for tax purposes. One of the conditions to avail of Business Relief is that an existing farm, which is currently worked as a farm, is transferred, and the business must continue to be operated by the new owner for a period of six years following the transfer.

Where you have a farm worth €2m, for example, it could be argued that it is relatively easy for a person to be able to continue the business for six years after transfer — after all, it would be expected to be commercially viable. However, take an example of a small farm worth €600,000 — it might not be financially viable for a son or daughter to give up their job to come home to continue farming the land for six years, in order to avail of business relief.

Similarly, if the previous owner has let the land by either lease or con-acre in the years running up to the transfer, then business relief is no longer an option.

If neither Agricultural Relief of Business Relief applies, the tax payable on the transfer of a farm worth €600,000 would be calculated the same as a transfer of cash, and would result in an inheritance tax bill of €105,000.

In summary, those with small holdings are most likely to be affected by the recent series of changes to inheritance tax rates and tax bands. It is harder for successors inheriting such farms to avail of either Agricultural Relief or Business Relief. It is critically important to properly plan the timing of the transfer of a farm to put your family in the best position to avoid inheritance tax (and, of course, capital gains tax and stamp duty).

Every farmer should arrange for their own succession plan in order to avoid taxes on transfer.

Your questions on this and other farming tax issues are welcome.

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