Changes announced in this year’s budget are set to alter one of the main tax reliefs applicable in the case of farm transfers.
Agricultural relief can vastly reduce the amount of gift or inheritance tax, more correctly referred to as Capital Acquisitions Tax (or CAT for short).
To see how this relief works in practice, take the following example.
A farmer owns 100 acres, together with stock and machinery, worth €1.5m.
The farmer decides to transfer his entire farming assets to his son. Normally, a child can receive gifts or inheritances within their lifetime totalling just 225,000, before CAT becomes payable. Any amounts received in excess of this are taxed at 33%.
In the absence of Agricultural Relief or Business Relief, a child receiving €1.5m worth of assets would face a whopping CAT tax bill of just shy of €420,000.
These figures may seem extraordinary, but are the current reality in transfers by a parent to a child, of non-farming assets such as houses, cash, quoted shares or other non-business assets.
Interestingly, before austerity measures kicked in, a similar transfer back in 2008 would have resulted in a tax bill of just over €195,000.
Since then, significant erosion of tax free thresholds, and a hiking of CAT rates, have increased the taxes.
For agricultural property, there are two reliefs, “agricultural relief” or “business relief”, which can significantly reduce or even totally eliminate exposure to CAT.
Where conditions are satisfied, both reliefs work similarly, in reducing the value of a gift or inheritance by 90% for tax purposes, although agricultural relief is seen as more generous, because it can also cover farmhouses.
Taking the above example, again, where the beneficiary can satisfy criteria for Agricultural Relief or Business Relief, the value of the farm, stock and machinery would be reduced to just €150,000 for tax purposes.
As mentioned above, a child can receive gifts or inheritances up to €225,000 tax free. In this example, agricultural relief reduced the value to just €150,000 which is below that €225,000 limit, and therefore, no gift tax (CAT) is payable.
Up to now, agricultural relief applied where:
n A transfer consisted of “agricultural property”, which is defined specifically within the legislation.
n The beneficiary, having received the agricultural property gift or inheritance , had mote than 80% of their assets in agricultural property.
n And the beneficiary retained ownership of the property for six years (10 years in the case of development land).
In the example cited above, so long as the child had less than €375,000 in non-agricultural property at the point of receiving the farm, then they would have had more than 80% of their assets in agricultural assets, and would qualify for agricultural relief.
The budget has introduced new changes to come into effect from January 1, 2015, adding a further condition for agricultural relief.
From January 1, 2015, and subject to other conditions, Agricultural Relief will be available only in respect of agricultural property gifted to or inherited by an individual who either subsequently uses the property for agricultural purposes for a period of not less than six years, or who leases out the agricultural property for not less than six years for agricultural use.
Importantly, if the successor chooses to farm the land themselves, the legislation contains a requirement that the farmer must be an active farmer, spending not less than 50% of normal working time farming land, and their farming activities must be on a commercial basis, with a view to realising profits.
On one level, these new rules are welcome, in that the amendments will prevent abuse of reliefs which were directly or indirectly encouraging land ownership by non-farmers. However, the new rules will pose problems where property is being transferred to a child, and that child will be farming the property, but does not satisfy the active farmer criteria.
This can be the case where a child has off-farm employment or, for example, where the child has either established or intends to establish a farming company, within the six-year period.
Where taking the leasing option, the new rules also insist that the lease is to an individual, which will have implications for those who have established farming companies.
On the ground, it is not unusual for retiring farmers to retain a small amount of land, together with the farmhouse, with the intention of transferring this land at a future date or on their passing. The new rules are particularly relevant in these cases.
From a succession planning point of view, there is an opportunity to transfer property under the old rules until January 1, 2015, but this should be given careful consideration, to ensure the tax implications of the transfer are fully understood.
No changes were made in this year’s budget to the second main relief, “business relief”, which provides an alternative, tax-efficient option, in limited circumstances.
Forthcoming changes to stamp duty, which increase stamp duty from 1% to 2% in some circumstances after January 1, 2015, could be considered an added incentive to more early. The above information deals mainly with the potential impact arising from proposed changes issued in this years’ Finance Bill. It is important to fully consider all tax implications, when considering succession planning.
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