Farm Finance: Is it time to restrict tax reliefs for family farms?

Over the past few decades, an expansion of tax reliefs has facilitated the infiltration of non-farmer landowners, with active farmers increasingly being priced out of the land buying market, writes Kieran Coughlan

Maybe now is the time to consider whether there should be a restriction on reliefs to favour land purchase by active farmers, or at a minimum away from the super wealthy.

Over the past few decades, an expansion of tax reliefs has facilitated the infiltration of non-farmer landowners, with active farmers increasingly being priced out of the land buying market.

Derisory financial returns from many of the commercial enterprises which occupy most farmers, along with a need to invest in mechanisation to overcome a tightening of labour supply have seen farm profits typically recycled into machinery and building infrastructure rather than into land purchase.

The number of farmers in the country has stabilised somewhat over the same period, helped in no small part by the decoupling of single farm payments, the capacity to earn income from part-time off-farm employment and the expansion of the State contributory pension to farmers.

The stability in the number of farmers masks the divergence between those who have expanded their businesses and those who have taken a back seat.

While each farmer is, of course, entitled to do whatever they want with their own holding, the reality is that the rural economy, the businesses that form the supply chain to farmers, and processors, etc downstream that are fed from farm output depend on a cohort of productive farmers.

Stability in the number of farmers coupled with investors and those with non-farming interests soaking up whatever land that comes on the market are together acting to restrict the capacity of productive farmers to expand their businesses.

Figures from the annual CSI/Teagasc Agricultural Land Market review highlight that just 0.3% of land comes to the market each year.

Meanwhile, figures from the CSO, albeit outdated at this point, show an increase in the volume of land rented in Ireland from 2013 to 2016, with about 17% of land in the country rented comprising a massive 2m acres, up about 3.75% over those three years.

Anecdotally, investors have become increasingly active over recent years.

Over the past decade or so, a variety of tax reliefs have been granted with the view of encouraging land mobility including:

• An increase in the tax-free exemptions applicable to long term leasing of land;
• The introduction of an exemption from stamp duty on long-term land leasing;
• An expansion of agricultural relief affording a 90% discount in the taxable value of inherited land which is leased;
• An expansion of the capital gains tax exemption on the sale or transfer of land allowing a period of up to 25 years of leasing to occur without affecting the underlying farmers capacity to claim retirement relief; 
• The facilitation of super low stamp duty rates of 1% in the transfer of land where the beneficiary leases the land in a long term lease.

The combination of these reliefs means investors can buy land, transfer it tax efficiently to successors and all the while avail of income tax exemptions on lease income.

Taken as an extreme example, a wealthy investor could transfer €10m worth of land to a child at a tax cost of less than €320,000.

The expansion of reliefs for land leasing has merit in freeing up land for more productive farmers, land which may otherwise be under-utilised, but in combination with other reliefs, the change in policy may have the opposite effect of attracting non-farmers to the land purchasing market, making it harder for productive farmers to secure the future of their business through land ownership.

Some years back, a restriction on the amount of assets that could qualify for the capital gains tax relief was introduced, with a lifetime limit of €3m now applicable where assets are transferred after the age of 65, which was touted as encouraging early transfers to successors.

Maybe now is the time to consider whether there should be a restriction on reliefs to favour land purchase by active farmers, or at a minimum away from the super wealthy.

Variations that could be considered could include a maximum total term of leases that qualify for the relief, a cap on the value of land that can benefit from agricultural relief where the beneficiary is not farming the land personally, or a deviation in the stamp duty rates that apply to land purchase by active farmers or investors.