A taxing issue for owners of farm dwellings
The question of what dwellings qualify for Agricultural Relief is one of the most complex aspects of farm succession planning, writes our expert
Farm succession can throw up a myriad of issues, generally ones that potentially could benefit the tax man.
Many are avoidable and can be worked around, but some are not and one such issue that has raised its head after being in deep slumber for most of the past decade is the dwelling house and the value of same.
I'm speaking of dwellings that do not qualify under the Revenue definition of agricultural property and consequently do not qualify for Agricultural Relief which can bestow a 90pc reduction in the market value of the property when gift or inheritance tax is being assessed. There are a number of reasons why a dwelling on a farm might not qualify as Agricultural Property such as:
- The dwelling is transferred on its own without land, or
- The dwelling is not the only and primary dwelling on the farm, or
- The dwelling and the land on which it is situate is not proportionate in size and character to the requirements of the farming activities, or
- The transferee is not eligible for Agricultural Relief but is eligible for Business Relief in which case the dwelling does not qualify.
They say that a rising tide lifts all boats and this also applies to the value of farm dwellings. In general farm dwellings do not have a very high value as typically they are surrounded by or are in close proximity to the farmyard.
However this is not always the case and some farm dwellings can be quite valuable in their own right with the value currently rising with the aforementioned tide.
Accordingly, people need to give due consideration to the future value of the dwelling and the tax consequences where they intend to retain ownership of it until they pass on. The case study (see panel) is based on an actual case.
FARM DWELLINGS AND LAND
I am frequently asked the question - does a particular dwelling qualify for Agricultural Relief or how much land needs to go with a dwelling in order for the entire holding to be regarded as Agricultural Property and qualify for relief.
The Revenue definition of Agricultural Property in this context which is 'Farm buildings and dwelling houses (and the land on which they are situated) that are proportionate in size and character to the requirements of the farming activities' does not really answer the question as every case is different.
Firstly, a farmhouse on its own, irrespective of whether it is in the middle of the farm or farmyard, is not deemed to be Agricultural Property but if that dwelling was transferred along with the farm, or part of it, it would be considered Agricultural Property. The question that this poses is: how much land should accompany the house in order to render it Agricultural Property?
Unfortunately there is no clear answer to this and one can only appraise each case on its merits.
For example, Revenue state that parcels of land of less than two acres are too small to be considered agricultural property and consequently a dwelling thereon is not Agricultural Property.
That does not mean that a dwelling on, say, ten acres is necessarily Agricultural Property as this may depend on the nature and extent of the agricultural activity being carried out on the ten acres.
That said, a house on ten acres or less could conceivably be regarded as Agricultural Property.
In practical terms the property should pass the 'Elephant Test'. If it looks like an elephant, if it acts like an elephant and if it sounds like an elephant, well then it is an elephant.
In other words, you'll know one when you see one. UK legislation is similar to Irish legislation on this subject and there have been a number of cases that have addressed this issue and in one such case it emerged that the following factors would appear to be relevant with regard to the character test in the context of a farmhouse:
- Is the house of a character appropriate by reference to its size, content and layout, with the farm buildings and the particular area of land being farmed?
- Is the house proportionate in its size, nature and requirements of the farming activities being conducted on the land?
- Would the educated rural layman consider it a farmhouse or a house with land?
- Is there is a history of agricultural production associated with the house?
As I stated earlier this matter is far from straightforward but where a reasoned common sense case can be made, most cases will get over the line.
Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone and Company, accountants and registered auditors; www.som.ie
Peter and his wife Joan transferred the family farm worth €2.2m to their son John back in 2007 when land values were at their peak. They did not transfer the house on the basis of advice given to them at the time.
In addition John got machinery, stock and entitlements to a value of €260,000. John qualified for Agricultural Relief so the tax value of what he received was €246,000. Peter died in 2012 and left everything to Joan who died in 2018.
In her will she left the house, which is valued at €320,000, along with Kerry Plc shares worth €220,000 to John. John's cumulative taxable gifts/inheritances from his parents now amount to €786,000. His personal exemption is €310,000 so he will be taxable on €476,000 giving rise to a tax bill of €157,080.
If Peter and Joan had transferred the dwelling (presumably retaining a life interest) along with the land in 2007 they would have saved John nearly €100,000 in tax.
By separating the dwelling from the land they rendered it a non-agricultural asset and ineligible for Agricultural Relief. Interestingly, now that it has been reunited with the land it becomes an agricultural asset once again.
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