Can more tax reliefs help increase farm sizes and lower the age of farmers?

'Fragmentation adds to farm costs and reduces operational efficiency'
'Fragmentation adds to farm costs and reduces operational efficiency'

Anne Kinsella

Land fragmentation is an issue that's often highlighted as an impediment to achieving targets for growth in the farming sector.

It is also cited as a source of inefficiency - the theory is that a farm that consists of two or more plots of land will not operate as efficiently as would be the case if the plots were reorganised and combined.

Fragmentation adds to farm costs and reduces operational efficiency.

Additional costs include extra labour, travel time, stock movement and inspection, and extra machinery and facilities.

With an increased number of boundaries, fragmentation may also create greater potential for disputes between landowners.

The average number of separate land parcels per farm in Ireland increased from 3.1 in 2000 to 3.8 in 2010 (Central Statistics Office). In 2010, well over half the total number of farms in Ireland (80,000) had three or more separate land parcels.

Fragmentation may occur at various stages in the evolution of the agricultural holding. A single farm may consist of numerous discrete plots, often scattered over a wide area.

So why is it that farm fragmentation is on the increase? Or is it? How does land fragmentation differ regionally? Is this a cause for concern?

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Dairy expansion in the south coupled with the increased momentum among drystock farmers to convert to dairy may partly explain this phenomenon.

Land fragmentation is particularly predominant in the west and border regions.

Farm structure in the west region in particular needs some positive intervention via more targeted taxation and policy incentives.

Farm fragmentation, coupled with smaller farm holdings and an ageing farm population, is exacerbating lower average farm incomes already prevalent on the ground.

In comparison to the national average farm income of just over €31,000 (Teagasc National Farm Survey), income in the west region averages just €17,876 for 2017.

This reflects the higher proportion of drystock farms in the west, with an average farm size of 35.7 ha - the lowest average farm size across the eight regions, compared to the national average farm size of 45.3ha.

Tax costs on land sales are also punitive for many farmers. These taxes must be paid even if the money is reinvested in land.

That said, some positive changes are occurring to promote farm consolidation.

In recent years, a number of schemes have been introduced to assist farmers to consolidate their holdings.

These schemes offer a reduction in either stamp duty or capital gains tax (CGT), the two taxes relating to the purchase or sale of land. In Budget 2018, stamp duty and CGT reliefs were combined into one scheme.

The potential tax savings on restructuring can be quite advantageous for farmers who qualify.

Consolidation relief

Consolidation relief may apply where land is disposed of and replaced with other land to result in a less fragmented farm.

The relief reduces the rate of stamp duty on eligible transfers of land from the current rate of 6pc to 1pc for qualifying applicants on the excess value of the land purchased over the value of land sold.

For this relief to apply, the purchase and sale transactions, involved in the consolidation must occur within 24 months of each other, with the initial sale or purchase of qualifying land taking place in the period January 1, 2018 to December 31, 2019.

In such a situation stamp duty will only apply at the rate of 1pc on the excess. If you are planning to restructure your farm, the first transaction must be completed by December 31, 2019.

Young trained farmer relief is also available, but you must meet specific criteria to gain it.

On land disposed of during one's lifetime the capital gains tax rate is currently 33pc.

When a farmer disposes of farmland during his lifetime, by sale, gift or exchange to another person, CGT rules apply.

CGT can be substantial if the land is in your ownership for a significant time period.

The conditions attached to the EU State Aid approval also restrict the scope of the CGT relief to agricultural land only. Relief is only available to claimants who are issued with a Farm Restructuring Certificate by Teagasc.

Restructuring your farm may not be as easy as swapping a field with your neighbour. It may involve more complex and numerous transactions with various parties.

The sale of an existing farm and the replacement of it by the purchase of another farm is not farm restructuring for the purposes of this relief.

It is important to seek taxation and legal advice before entering into any transaction. The reliefs, if fully availed of, by a qualifying applicant reduce the CGT liability to zero.

Consolidation benefits

Farm consolidation leads to a reduction in the fragmentation of the farm and consequentially an improvement in the operation and viability of the consolidated farm.

But it is the case that policy and taxation incentives can only go so far in nudging farmers to change their behaviour with regard to land fragmentation?

Consolidation is a complex area and no two farms are the same.

A decision to consolidate is not an easy one. It may involve giving up a plot of land which is the result of generations of family labour.

Looking beyond these emotional ties and focusing on the economic and efficiency implications is the first challenge.

A farmer's relationship with their land is also a complex one.

The farm and the individual plots and boundaries represent a patchwork quilt of the farmer's achievements over their lifetime.

Lifelong memories are involved as well as the memories of generations past.

A boundary may not just be a physical boundary but an emotional one too. The story of a family's toils can be etched in a plot of land.

The key to smooth consolidation which works for all parties is good communication and information.

Every situation is unique and some situations can be tricky, but there may be solutions that people don't know about until they actively investigate them.

All obstacles can be overcome, albeit some may prove more difficult than others, but with targeted incentives the path and financial burden may be somewhat eased.

It is important that farmers familiarise themselves with the main conditions for reliefs by talking to their farm consultant or Teagasc advisor. More information is also available on the Department of Agriculture and Teagasc websites.

Anne Kinsella is an economist with the Teagasc, Rural Economy & Development Centre, Mellows Campus, Athenry, Co Galway email:

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