Recent estimates suggest about 640,000 hectares is rented by way of conacre. Leasing takes a poor second place to conacre, with little more than 100,000 hectares in long-term leases.
Of course, some cropping is particularly suited to conacre-type arrangements — such as potatoes, beet and vegetables which are usually grown in rotation. However, the majority of land rented under conacre arrangements is plain tillage land or grass land.
The conacre system is a throwback to a former era and contrasts significantly with our European neighbours, where such short-term letting systems are not commonplace.
In fact, in some EU countries, there are minimum lease periods, in some cases as high as nine years.
Similarly, in the UK, many lettings are undertaken by way of tenancy arrangements which can last for decades.
The conacre system has some advantages, but overall, it is seen as restrictive. A tenant is not likely to invest in the land and, in particular, may be reluctant to use expensive fertilisers such as phosphorous and potassium, or even lime, which may impact on the long-term fertility, productivity and potential of the land.
Similarly, with short-term lettings, a tenant is most likely not to invest in infrastructure, buildings, roadways, drainage or cattle-handling facilities.
Likewise, a farmer may be reluctant to expand their farming operations to a higher level, if there are doubts about securing land on a long-term basis.
Leasing is already streets ahead compared to conacre from a tax-efficiency perspective. Long-term lease land qualifies for an income tax exemption, the first €12,000 per annum can be exempted from income tax for a land owner, in the case of a qualifying five-year lease.
The exemption threshold rises to €15,000 and €20,000 per annum in the case of seven and ten-year leases, respectively.
Leasing also offers significant capital gains tax advantages. It is possible for land which had been farmed by the owner for 10 years and which is subsequently leased under a qualifying long-term lease to avail of the same exemptions from capital gains tax as if the farmer had continued to farm the land. In contrast, land which is let under a conacre arrangement loses any capital gains tax relief which may have been available, which can result in significant tax liabilities, where the land owner intends on selling or transferring their land.
As part of the current review of farm tax exemptions, Ireland’s under-utilisation of leasing is under the spotlight. The significant income tax exemptions and capital gains tax exemptions have not had a significant impact on the way Ireland’s lettings are undertaken. The Minister for Finance has suggested it may be time to consider whether to adopt the carrot or stick approach.
With such generous tax exemptions for land leasing available, the options for incentivising leasing is limited. However, there is scope for expanding the leased land exemption to leases between relatives, in limited circumstances.
Similarly the income tax exemption for leasing has not been made available to lettings between land owners and a farming company.
Land leasing does have a relatively minor stamp duty cost, at just 1% of one year’s rent, and there may be scope to scrap this stamp duty charge, to further remove tax barriers to leasing.
On the other hand, to disincentivise conacre, there have been suggestions of a higher tax applicable to this form of rental income, although this is unlikely to gain much traction.
From a compliance point of view, conacre arrangements may become mandatorily reportable, putting them on a par with and similar to land leasing arrangements in the Property Services Regulatory Authority, and to residential lettings in the Private Residential Tenancies Board.
Changing the legal structure of conacre may also swing landowners to leasing. This could be achieved by giving tenants right of renewal, putting the tenant on the same footing as if they had engaged in a lease.
Beyond leasing and conacre, there is anecdotal evidence of tracts of land being let by the back door, through use of land but retention of map-type arrangements. These arrangements run a risk of both taxation and loss of the single farm payment.
After 30 years of land lease exemption from income tax, the changeover to leasing hasn’t been a success, so it’s likely there will be at least some level of reform in the review of agri-taxation measures, to add further support to leasing. However, care must be taken not to drive landowners into back-door lettings.
There could be changes ahead for leasing and conacre, how they might affect individuals would need to be examined more closely, for the most appropriate advice.