Tax implications of leasing farmland
Important considerations to look out for if you're about to take the plunge
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: