The Budget has brought a raft of changes in tax reliefs applicable to Irish farmers.
In particular, wide ranging enhancements of the income tax exemption from land leasing will be of benefit to many farmers who have been looking for greater surety when planning to expand through the medium of leased land.
The changes on land leasing include an increase of 50% in the amounts of lease rental income that qualifies for exemption from income tax. In short, this means up to €18,000 per annum of lease income per person can be exempted from income tax, in the case of five-year leases.
Up to €22,500 per annum of lease income per person will be exempted from income tax in the case of seven-year leases and, a sizeable €30,000 per annum of lease income can be exempted in the case of ten-year leases.
A new higher threshold of €40,000 per annum can be exempted from income tax in the case of leases longer than 15 years.
These limits are doubled in the case of married spouses, and given the ownership structure of land parcels in Ireland, the above mentioned extensions mean that in the vast majority of cases, the entire rental income coming from leasing out of farm land may be excluded from the income tax net.
Furthermore, the Minister has signalled an extension of the relief to leases in the case where the tenant is a company. This is seen by many as the correction of an oversight in the previous legislation.
The leased land exemption has been further enhanced by removing the lower age limit for land owners who can avail of the scheme, which had stood at 40 years of age. The Minister has indicated that, subject to conditions, Retirement Relief (a potential exemption from capital gains tax) may now apply in instances where land is transferred up to 25 years after the first leasing, which is up from the 15 year timeframe rolled out in last year’s budget.
All in all, these changes remove substantially all of the taxation barriers which had raised doubts for land owners in the case of land leasing.
But perhaps the most important budgetary announcement on land ownership was that land which is currently let out by conacre may qualify for an exemption from capital gains tax, where that land is either leased on a long-term basis, or disposed of by the owner before December 31, 2016, although the exact rules in relation to this are yet to be clarified. This seems like a golden opportunity to correct a ticking capital gains tax time bomb for land owners who have let their land by conacre.
The tax rules applicable in conacre situations normally result in landowners facing potential capital gains tax liabilities on the disposal or transfer of their land. This new window of opportunity allows such land owners to obtain Capital Gains Tax reliefs, where they either dispose of their land or convert to leasing.
The cumulative effect of these changes make leasing by far the most advantageous method of renting out land, due to the package of tax reliefs and exemptions that go with it.
On stamp duty, a three-year extension to the half-rate stamp duty applicable to the transfer of land between blood relatives is welcome, but interestingly, the relief is now focused only where the transferor is under 65.
On the capital taxes side, there has been no change to the tax rate (33%), nor in the tax free thresholds. One of the positive measures to ensure tax reliefs are focused at active farmers is the amendment to Agricultural Relief, which is set to restrict the tax break, from January 1, 2015 only to cases where either the land is gifted or inherited by an active farmer, or to individuals who lease out land on a long-term basis.
This change to Agricultural Relief reduces the potential for this valuable relief to be abused in the case of persons looking to transfer wealth tax efficiently through the purchase and transfer of agricultural land.
However, this amendment could have been bolstered by a capping of agricultural assets which qualifies for the relief, such as is the case in respect of retirement relief.
On VAT, the increase in the flat rate addition for unregistered farmers from 5% to 5.2% will be of small benefit to the majority of farmers.
Disappointingly, no measure has been introduced to deal with income volatility, other than increasing the averaging period for farm incomes from three to five years.
Volatility is a real and relevant issue as milk, beef and grain prices have all dipped significantly this year.
Additionally there seems to be a lost opportunity to support farmers with enhanced stock relief, as farmers gear up for post-quota expansion.
Equally, there has been no accelerated capital allowance scheme for farm building investments, nor extension of tax relief through capital allowances for the purchase of milk production rights or the “sharing up” costs required by some dairy processors.
The lack of innovation in these areas of tax policy is particularly disappointing, given the huge participation by farmers, processors and other stakeholders, where some particularly clever yet cost-effective tax proposals had been suggested in the tax review.
The Finance Bill, to be published later this month, will contain the actual legislative changes, and as always, professional advice should be obtained to determine how the tax changes will impact on your specific transactions.
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