How farmers to avoid the Capital Gains tax net when transferring land
Retirement Relief measures can help farmers bypass or reduce Capital Gains tax
The general view that I encounter from farmer clients contemplating a transfer of the farm to a son or daughter is that stamp duty, and possibly gift or inheritance tax, are the main hurdles to be jumped. It's not necessarily so.
Increasingly I am encountering problems with Capital Gains Tax in a variety of situations which are listed in Table A. Generally, potential Capital Gains tax issues are solved by availing of a relief known as Retirement Relief.
This relief is available to farmers over 55 years and, despite the fact that it is called retirement relief, it does not mean that the farmer has to retire to avail of it.
There are two versions of Retirement Relief, one which relates to family transfers and one which relates to a sale of the farm assets such as land.
To qualify for either relief, the land must have been owned and farmed for the ten consecutive years prior to transfer or prior to entering into a letting/lease agreement subject to certain conditions which I will outline.
If the land which is the subject of the transfer has been owned and farmed for ten consecutive years prior to transfer or first letting, the transfer will be free of Capital Gains Tax where the transferor is over 55 years.
However, where the transferor is over 66 an upper limit of €3m will apply and any value being transferred over that figure will be subject to Capital Gains Tax at 33pc.
In the case of transfers to a child (son, daughter, favourite niece/nephew) where the land was rented or leased out prior to transfer, the maximum period in which the land can have been leased is 25 years.
A child of a deceased child will qualify as a child for this relief. It should be noted that in the case of family transfers where the land has been rented out for a number of years prior to transfer or where the transferee has had the use of the land it is not necessary to have a formal lease in place at the time of transfer, unlike transfers or sales to unrelated parties which do require a formal lease to be in place since 31 December 2016.
Situations where CGT can arise
• Farmer transferring has not owned all of the land for ten years or more.
• Farmer transferring did not farm the land for 10 continuous years prior to transferring or first letting.
• Some or all of the farm has been let or leased for more than 25 years.
• Farm is in joint names with spouse who has never had any involvement in the running of the farm.
• Farm is worth more than €3m and the farmer is over 66.
USE BY A SPOUSE
Where the farm is jointly owned by a husband and wife or where both spouses enjoy separate ownership and one spouse had little or no involvement in the running of the farm, a question may arise as to whether that spouse satisfies the '10 year farmed' condition.
Alternatively, the farm may have only been placed in joint names within the last ten years whereby the 10 years 'farmed' rule on the part of one spouse may not be satisfied.
The 10-year ownership requirement for a spouse in joint ownership is not a problem as his/her spouse's period of ownership will cover both spouses but the 10 years 'farmed' requirement is a different matter and must be satisfied. Such situations should be approached with caution and good tax advice sought.
Capital Gains Tax like most other taxes is subject to self-assessment and issues such as those I just outlined may not raise their heads until Revenue decide to do an audit which could be a number of years after the transfer had occurred.
The period of ownership and use of the land by a deceased spouse will be taken into account in satisfying the ten-year rule where the surviving spouse decides to dispose of that land.
Shares in a family company
To qualify for Retirement Relief in disposing of or transferring shares in a family company, the person disposing of the shares must have been a working director for a minimum period of 10 years during which he/she was a full time working director for not less than 5 years.
This is an important point for spouses to take note of who are not working directors in a family company but who have a shareholding in that company.
The relief also applies to land, buildings and machinery which the individual has owned for at least 10 years provided that such assets were in use by the company and were disposed of at the same time and to the same person as the shares in the company.
Providing that land was owned and farmed for 10 years prior to the date of sale or prior to first letting and the sale proceeds are less than €750,000, a farmer over 55 years and under 66 years may dispose of part or all of his farm free of capital gains tax.
Where the person disposing is over 66, the limit is reduced to €500,000. Where disposal proceeds exceed €750,000 (or €500,000) there is marginal relief which is based on the excess proceeds over the relevant limit being subject to 50pc tax.
This applies up to the point whereby taxing the actual gain at 33pc becomes more beneficial. In this context it is important to note that a subsequent disposal may result in a clawback of relief already gained. The €750,000/€500,000 is a lifetime limit so once you have exceeded that limit any further disposals may result in tax being charged on the earlier disposal.
It should be noted that while transfers between spouses are exempt from tax any such transfers will eat into the €750k/€500k threshold depending on the value of the property transferred.
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
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