Farm Ireland
Independent.ie

Sunday 28 May 2017

Tax implications of leasing farmland

Important considerations to look out for if you're about to take the plunge

In order to qualify for the leasing income exemption, the land must meet the special definition of farmland as outlined in the tax legislation
In order to qualify for the leasing income exemption, the land must meet the special definition of farmland as outlined in the tax legislation

Mark Doyle

Even though land prices have come down significantly in the past few years, many farmers still cannot afford to purchase farmland. Last year, the national average price for an acre of land was approximately €8,700.

As the capital outlay to acquire a substantial block of land is prohibitive, many farmers considering expansion will be looking at the option of leasing land.

For the lessor of land there are a number of important tax considerations.

Income tax exemption for leasing of farmland

Subject to certain conditions, an individual aged 40 years or over, or an individual who is permanently incapacitated by mental or physical infirmity from carrying on a trade of farming, is entitled to have certain income derived from the leasing of farmland exempted from tax. Qualifying leases must be for a minimum period of five years. Where the lessor's income consists of rent from a qualifying lease(s), the exemption shall not exceed:

  • €12,000 for a lease of between five and six years;
  • €15,000 for a lease of seven years or more, for leases entered into on or after January 1, 2006;
  • €20,000 for a lease of 10 years or more, entered into on or after January 1, 2007.

In order to qualify for the leasing income exemption, the land must meet the special definition of farmland as outlined in the tax legislation. "Farmland" for this purpose, means land in the State wholly or mainly occupied for the purposes of husbandry and includes a building (other than a dwelling house) situated on the land and used for the purposes of farming that land. Both parties must enter into a "qualifying lease" which is a lease of farmland that:

  • Is in writing or evidenced in writing;
  • Is for a definite term of five years or more;
  • Is made on an arm's length basis between one or more qualifying lessors and one or more qualifying lessees.

A qualifying lessee is an individual who is not connected with the lessor and uses the land for the purposes of their farming activities. It is important to note, therefore, that a farmer would not be able to claim this relief for a letting to a company. Revenue has issued a precedent stating that a niece or nephew would not be connected with an aunt or uncle for the purposes of this relief.

Where land has previously been leased under a verbal agreement, and no formal lease has been entered into, it is worth considering documenting the existence of the lease at this stage and seeking a repayment of income tax. A published Revenue precedent provides as follows:

"The Commissioners would consider granting relief under Section 664 Taxes Consolidation Act 1997 if -- (a) the lessor could prove to the satisfaction of the Inspector of Taxes that the farmland had actually been leased in the period and that he had received rental income from the leasing and had returned same for income tax purposes, and (b) all the other conditions provided for in Section 664 Taxes Consolidation Act, 1997 had been met."

Where land is let along with an entitlement by the lessee to payments relating to the farmland under the EU Single Payment Scheme, provision is made to allow the leasing income arising from the letting of such entitlements to qualify for exemption. The leasing income of a husband and wife is treated separately for the purposes of the relief whether they are assessed jointly or not. In this regard, it should be possible to avail of two exemption limits.

Retirement relief

Retirement relief is a relief from CGT available to farmers on a disposal of farmland, provided certain conditions are met. The relief can allow a farmer to dispose of qualifying assets and receive tax-free proceeds of €750,000 or transfer farm assets to a child with no upper limit in terms of the value of the farm assets passing.

One of the conditions for the relief is that the land must be used by the farmer for the purposes of their farming trade. If the land is leased, it will not be in use for the purposes of the farmer's trade, rather it will be categorised as an investment-type asset on which relief would not be available. There are a number of exceptions to this rule:

  • Land that was owned and used for 10 years, ending with a transfer of an interest in that land for the purposes of the Early Retirement Scheme;
  • Land that was let at any time in the period of five years ending on the date of disposal under a CPO, where at the time the land was first let it had been owned and used by the individual for the purposes of farming for a period of not less than 10 years ending on the date of the lease;
  • Land which has been let by the individual at any time in the period of 15 years, ending with the date of disposal, where immediately before the land was first let in that 15-year period, the land was owned and used by the individual for the purposes of farming for a period of not less than 10 years ending with the date of the first lease, and the disposal is to a child of the farmer.

The availability of the income tax exemption makes the leasing of farmland attractive from an income tax perspective. It is worth considering reviewing previous and current leasing arrangements to determine whether you are eligible for the exemption. Before leasing the land, some consideration should be given to the impact of leasing on the availability of retirement relief and your future plans.

Mark Doyle is tax director at Grant Thornton

Indo Farming



Top Stories