Revenue has issued an update clarifying last year’s changes to the gift/inheritance tax regime applicable to farm land.
Farm land, farm buildings, farm houses, stock, machinery and single farm payment entitlements can, where relevant criteria are satisfied, qualify for “agricultural relief” from gift or inheritance tax.
Agricultural relief is of huge importance as a tax-planning tool, when organising the transfer of a farm from one generation to the next.
Without agricultural relief, the viable transfer of a typical family farm would in many cases be impossible, due to the exorbitant tax rates that could otherwise apply.
In practical terms, where agricultural relief can be claimed, it allows a parent transfer up to €2.25m worth of agricultural property to their child, without Capital Acquisitions Tax (CAT) applying.
In contrast, a child receiving cash, residential or commercial property, shares or savings, is liable to CAT at 33% on any amounts above their lifetime threshold of just €225,000 tax free.
By way of example, a child inheriting €500,000 in savings from their parent would have a tax liability of €90,750, but a child receiving €500,000 in agricultural property with the benefit of agricultural relief would have no liability to CAT.
The importance of agricultural relief is reflected in the fact that its cost to the exchequer, estimated at €77m in 2012, is exceeded in terms of its importance as a relief only by capital allowances (being the tax write-off for the purchase of specific assets).
Although the “cost” in foregone tax takings could be seen as high, in fact, the benefits of granting this relief are even greater.
Research by Indecon as part of the Agri-Taxation Review suggested that in terms of capital acquisitions reliefs, a €1.88m impact on output is obtained for each €1m in tax relief.
As part of that Agri-Taxation Review, it was concluded by the group that this relief “is a vital measure to ensure the ongoing viability of farming businesses that pass from one generation to another”, while also recognising that “while a farming businesses may be asset rich, in many cases, the income from the farm could not sustain major tax charges, hence the existence of agricultural relief”.
The agri-taxation review did result in a realignment of agricultural relief.
The effect of these changes was to focus the relief solely at full-time farmers, young trained farmers, or those who leased out their land on a long term basis — the key objective here being the targeting of the relief towards active and productive farmers.
However, some anomalies immediately cropped up, which have required clarification from Revenue’s end.
For instance, the new measures included the capacity for non-trained farmers only to avail of agricultural relief so long as they farmed land on a full-time basis (more than 50% of their normal working time).
This was quickly clarified — as the Finance Bill worked its way through the Oireachtas — and generally defined to consist of 20 hours of farming time per week.
It has also been accepted that if a person can show that his or her normal working time is somewhat less than 40 hours per week, the 50% requirement will be applied to the actual hours worked, subject to the farmer being able to show that the farm is farmed on a commercial basis and with a view to the realisation of profits.
In terms of maintaining records of the amount of time worked, Revenue have suggested that the number of hours worked should normally be clear from the level of farming activity carried on and from the normal books and records of the farm, including purchases, sales, livestock records (where relevant), and that, in general, there is no requirement to keep a time-sheet of hours worked on the farm.
I would suggest that from a taxpayer’s own perspective, if he/she is in any doubt as to whether they are working a sufficient amount of time to qualify for the relief, they should retain their own records of the hours worked.
Another anomaly which arose as a consequence of the changes was the potential dis-application of the relief to forestry land.
In general, forestry is less labour-intensive that other forms of farming, and for non-trained farmers, it would in most cases be difficult to satisfy the “50% of normal working time” criterion.
For forestry, the option to lease out land in order to qualify for agricultural relief is simply non-practical, and therefore, in the absence of clarification, it would have seemed near impossible to claim agricultural relief on forestry land.
Thankfully, Revenue have taken a realistic view, and will facilitate agricultural relief, if a farmer can demonstrate that the forestry is actively managed on a commercial basis — even if much of the work is subcontracted to third parties — and keeps the normal books and records required for tax purposes.
As mentioned above, a recipient of agricultural property can still avail of agricultural relief by utilising the leasing option, where they have no intention of farming themselves, or cannot commit to farming for more than 50% of their time.
It is a requirement under the new rules that the lease is for a minimum period of six years.
Revenue have also issued clarity on this aspect of the legislation, suggesting that the land owner “should establish that the lessee has the required farming qualification, and the lease should provide for this.
In addition, the lease should contain a clause requiring the lessee to farm the land so as to satisfy the ‘active farmer’/’working time’ requirements for the duration of the lease.
The lease should provide that any breach of these requirements will result in the termination of the lease.”
Previous guidance on this matter also suggested that it would be possible for a land owner to switch between farming the land personally and leasing it, so long as the relevant criteria for each aspect were satisfied.
Given the significance of agricultural relief as part of the tax efficient transfer of agricultural property, relevant professional advice should be obtained.
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