Expanding farmers may be disadvantaged as outside investors drive land prices upwards

A review of the land prices attained in 2013 suggests values are on the rise, with some suggesting investors, emigrants, and those looking to avoid risk exposure to their large deposit balances, are driving buoyancy in the land market.

A high land price is good, if you are selling. But, for most farmers with ambitions to expand, high land prices mean that buying any significant tract of land is neither affordable nor economically viable.

Meanwhile, investors with cash to spend look at land differently. The return in the form of rents is almost a certainty, land is of course a non-perishable asset, and ownership and title are readily obtained, with relatively low transaction fees.

Recent changes to the tax regime have stimulated investors to look at land. If they buy land in 2014, they can avail of a capital gains tax exemption on any appreciation in values if the land is held for seven years. They can avail of a partial reduction in capital gains tax if land is held for a longer period.

Income tax rules also encourage investors to plug money into land, it is possible to avail of an income tax exemption on up to €20,000 per annum of rental income derived from leased land.

Similarly, inheritance tax rules also make land the ideal asset for the super-wealthy to pass on a tax-efficient inheritance to their successors.

As the amount of land that comes available for sale in Ireland is particularly small, rising demand is a strong driver of relatively high prices.

Recent figures suggest about 0.3% of land, or less than 10,000 hectares per year, comes up for public sale in Ireland. At this rate, it would take about 350 years, on average, for any single plot of land to come on the open market. Instead, it is being passed on inter-generationally or transferred by private treaty for hundreds of years.

Historically, the amount of land coming to the market used to be much higher. In the early 1990s, over 30,000 hectares was being traded per year, about three times the amount that currently comes to the market.

Reasons behind the drop in land sales may be related to a generational glut in the profile of farmers. A lot of Ireland’s current farmers would have been in the prime of their working careers in the years from 1990, and a relatively low number of farmers retiring in this period would have reduced the amount of land available.

The introduction of contributory pensions, the early retirement scheme, the decoupling of subsidies and the creation of single farm payments, may also have had the effects of prolonging a farmer’s career and length of land ownership.

Historically, ageing farmers who were no longer able to farm due to physical infirmity, and faced impoverishment, would have been more inclined to sell, lease or transfer land.

Our existing system now results in “golden years” farmers who can be in receipt of pension and single farm payments with little or no farming effort required.

Looking at Ireland’s land ownership from a macro-economic point of view, what policies can be put in place to prevent productive land from being tied up by investors, or being held in a state of suspense by non-active farmers?

On the investment front, surely there is no need for tax-driven stimulus in the form of capital gains tax exemptions to encourage investors into Ireland’s already tight land market, nor for manipulation of inheritance tax rules by the super-wealthy.

The reliefs attaching to farm land should be applicable only to owners and successors who are actively farming the land.

Different countries take different approaches to controlling their land markets. For example, in France, the SAFER agency effectively controls the sale of land, the local council has first refusal on all land sales, effectively preventing get-rich-quick developer and speculator activity.

The programme also ensures that locals are given an opportunity to access local land.

Ireland’s farmers have fragmented land ownership, in many instances, they may own three or four plots of land distributed over a parish or more. This too was the case in France, prior to the introduction of SAFER in the 1960s. Since its introduction, land sales are skewed to offer an opportunity to neighbouring and new entrant farmers, helping existing French farmers enlarge their farms and consolidate land holdings.

Land ownership is a recurring hot issue in Ireland. At governmental level in the late 1970s, it was thought that some form of controls should be introduced.

Opposition parties at the time pointed out that people outside agriculture were acquiring large tracts of land, with adverse effects on agriculture in general, but particularly on small-holders who had been hoping to increase their holdings.

It was noted by the Minister for Agriculture that land was being targeted by non-farmers as a hedge against inflation, such that small and medium sized family farmers had little or no possibility of getting a few extra acres, or at least getting them at some kind of reasonable price.

Various proposals were considered at the time, including the possibility of applying an annual charge, rate or levy on land owned by non-farmers. Other options included limiting of land purchases to those who have been farming or working on the land for a number of years, or who have spent some years receiving agricultural training.

It was noted by the Minister for Agriculture in 1978 that fundamental change was needed at that time.

Looking at Ireland 35 years later, it seems nothing has been done to address the same recurring issues.

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