A beginner's guide to the long-term impacts of leasing, letting or incorporating your farm business

Often, the implications are only understood after the change in business has occurred, at which point, mitigation rather than salvation is the order of the day, writes Kieran Coughlan

As a farmer, the decisions you make now can affect your business for many years to come.

As a farmer, the decisions you make now can affect your business for many years to come.

We know this to be true for breeding, land drainage and farm building and infrastructure expenditure programmes.

Usually, the expectation is that investment now will reap rewards for years and even decades to come.

From a tax planning and financial perspective, the choices made now can similarly have implications for years and decades to come.

Decisions such as letting farmland can either trigger the expiration of capital gains tax reliefs or begin the countdown on capital gains tax relief for the sale or transfer of farmland or for the sale of milk production shares and single farm payment entitlements.

Case study

By way of example, a farmer who is scaling down his farm enterprise decides to let some of his land by way of conacre and expects he will not farm the land at any future point again.

In such circumstances, the farmer has now locked himself out of the capacity to sell the land to a third party on a potentially tax-free basis, or sell or transfer sites to any person other than direct family members on a potentially tax-free basis.

Had the farmer elected to let the farm by way of lease rather than conacre, then the tax reliefs available to him under his status as a farmer could be extended for up to 25 years after the point of first letting.

The Capital Gains Tax rules dealing with this type of situation changed after December 2016, meaning that any conacre arrangements after that date effectively debar a farmer from availing of capital gains tax relief on the disposal of property to persons outside of their immediate family members.

Another common hazard is created when farmers transfer farmland or purchase farmland in joint names with their spouse, where that spouse is not themselves an active farmer (e.g. farming in partnership with their spouse), to do so will create an environment where capital gains tax relief will only apply partially.

On a separate vein, the decision to let farmland either by conacre or by lease can impact on a successor's capacity to claim business relief.

Successors who receive a gift or inheritance of farmland can substantially reduce their exposure to gift or inheritance tax by availing of either Agricultural Relief or Business Relief.

The reliefs have some common features but notably, Agricultural Relief is only available where substantially all of a beneficiary’s assets are made up of agricultural assets, a requirement that does not exist where business relief is concerned.

Beneficiaries intending on claiming agricultural relief can opt to lease out their farmland, whereas those claiming Business Relief are required to continue the business for at least six years post-transfer.

A successor who cannot pass the Agricultural Relief asset test readily, as a result of say owning too much non-agricultural property (including say for instance their family home or rental property), would naturally wish to consider business relief as an alternative.

Where the farmland has been leased out or let by conacre, prior to the transfer to a successor, this can either impinge or totally extinguish the capacity of the successor to claim business relief meaning a successor is left in the awkward position of being locked out of both Agricultural Relief and Business Relief and facing 33% gift or inheritance tax on the value of assets transferred to them above their available lifetime tax-free thresholds.

The key message here is not to give readers an in-depth education on the various nuances of specific tax reliefs, but rather to draw awareness to the fact that changes in the format of a farming business, either by way of leasing, letting or incorporation of a farming company can have long term impacts for both the farmer themselves and for potential successors.

Often, the implications are only understood after the change in business has occurred, at which point, mitigation rather than salvation is the order of the day.

The advice must then be if you are considering changing the way your farming business, obtain advice prior to the change rather than subsequently to avoid unfortunate taxation pitfalls that can arise.

Readers should obtain specific advice relevant to their own personal circumstances.