Kieran Coughlan: Budget must balance protecting Agricultural Relief with curbing abuse
A significant proportion of farm transfers effected in the country pass from one generation to the next with little or no gift or inheritance tax as a result of Agricultural Relief. File photo
This year’s Budget announcements are now just weeks away, and one of the most important tax reliefs available for farmers is likely to be overhauled.
A significant proportion of farm transfers effected in the country pass from one generation to the next with little or no gift or inheritance tax as a result of Agricultural Relief.
Beneficiaries who avail of Agricultural Relief see the taxable value of the gift or inheritance of 'agricultural property' (including farmland, buildings, stock) reduced by 90%, so that inheritance or gift tax is calculated on just 10% of the market value, and standard tax-free thresholds can reduce the taxable gift or inheritance to zero.
Agricultural Relief has been available to farmers since the inception of gift and inheritance taxes in 1976. Back then, Agricultural Relief was much more restricted through it being capped at 50% of the market value to a maximum of £100,000, but the tax-free threshold at the time was generous at £100,000.
The relief changed over the years and became more generous in the 1990s. In 1994, for example, the first £300,000 of land and buildings could have benefited from 80% relief in the case of a gift and 65% relief in the case of inheritance, with the excess over this level qualifying for 30% relief.
Interestingly, at that time, the tax system was geared to encourage lifetime transfers by giving a greater discount to assets transferred via gift as opposed to inheritance.
By February 1996, the relief had been extended significantly further such that all assets, regardless of value, could have qualified for 75% relief and irrespective of whether the transfer was occurring by gift or transfer.
In the following year, as a result of the Finance Act 1997, relief was granted at a rate of 90%, a rate that continues to date. Minister Ruairi Quinn, in presenting the budget of the day, remarked that the change would "reduce the tax impact on the transfer of a family business".
In the intervening years since then, Agricultural Relief has undergone some further amendments, including a major overhaul in 2014, which was designed to enhance security of tenure as a result of the Agri-Taxation Review.
The Department of Finance noted at the time that "changes are being introduced to target the relief so that agricultural property is actively used for agricultural purposes. From January 1, 2015, and subject to other conditions, the relief will be available only in respect of agricultural property gifted to or inherited by active farmers and to individuals who are not active farmers but who lease out the property on a long-term basis for agricultural use to such farmers".
The Agri-Taxation Review of 2014 mentioned above noted "there are concerns that the definition of ‘farmer’ for the purposes of the relief is not sufficiently robust to ensure that this relief is only being availed of by active, productive farmers".
It can be argued that the changes introduced in the Finance Act 2014 had no meaningful impact in addressing the issue of the use of the relief as an intergenerational wealth transfer mechanism, as the rules that existed at the time and that continue to this day simply required that the beneficiary retain ownership for six years.
Last year, the minister for finance attempted to deal with the issue by making it a condition that only land which was owned for the six years prior to the transfer date and which was farmed by the transferor as a suitably trained or full-time farmer, or which was leased to a suitably trained or full-time farmer, could benefit from Agricultural Relief.
The move was, in principle, one in the right direction, but failed to take account of practicalities such as land being owned by one spouse and farmed by another, or lands which were being made available to a child without a formal lease being in place.
The new rules also don’t deal adequately with farm houses or with the gift of money for the purpose of acquiring agricultural land. The upcoming Budget is likely to see a redrafting of new Agricultural Relief rules.
Undoubtedly, this relief is the single most important relief to allow the transfer of family farms from one generation to another, and the existence of the relief in one form or another for nearly 50 years is a testament to its importance.
A balance must be achieved either through Agricultural Relief or other taxes such that land owned by non-active land owners doesn’t benefit from the relief perpetually from one generation to another or non- interests using land ownership as a tax-efficient mechanism for wealth transfer, and in doing so, restricting the amount of land that comes to the market to allow for the sustainable expansion of genuine family farms.
It will be interesting to see how this balance is addressed in the upcoming Budget.
