The limits of agricultural relief - How not to get hit with a massive tax bill when inheriting land
Martin O'Sullivan looks at the fine detail of Agricultural Relief tax breaks for farm families
If a day passes that I do not receive a query on the tax implications of farm succession it's probably because the day is good and farmers are out making the metaphorical hay while the sun shines.
However, in the past eight months there have not been too many such days and hence the stream of queries has been constant.
I generally enjoy dealing with readers' queries as more often than not I am the bearer of good news - the incidence of tax arising on farm transfers or inheritances is very low and the enquiring farmer is so thankful and relieved that I am made to feel that I have had an influence in saving him or her from the clutches of the taxman.
In this article I will deal with a recent query I received that appeared on first reading to be a straight forward Agricultural Relief query case, but on closer investigation was far from simple.
Most farmers who have given some thought to the question of succession will be aware of Agricultural Relief and the various percentage limits associated with this relief (see table below).
There is firstly the 80pc asset test where 80pc or more of the successor's gross worth on the valuation date must comprise farm assets.
Then there is the 90pc reduction in taxable value as a result of qualifying for Agricultural Relief. Since the 2014 changes in CAT (Capital Acquisitions Tax) rules, a further two percentage limits have come over the horizon.
Firstly, there is the 50pc weekly working hours requirement for successors who do not have a Green Cert or equivalent, and added to that is a requirement that in cases where the land is to be leased to a qualified or full-time farmer, 75pc of the agricultural property on which relief is claimed must be leased for qualifying farming purposes.
This final addition to the family of percentage restrictions proved to be the crux of the matter in the following query, which I will set out as a case study.
Farmer Joe passed on last March and left his land, farm dwelling, farm machinery and stock to his son John, who is in full-time employment in Dublin.
John has a Green Cert but has no intention of farming for the foreseeable future and intends to lease out the farm for 10 years to his first cousin, who is a full-time farmer. John and his wife have their principal private dwelling in Dublin.
As his father was in failing health, John had transferred his joint ownership share to his wife in anticipation of him having to qualify for Agricultural Relief.
John has savings of approximately €50,000 and a car worth €20,000.
The farm has been valued at €600,000, the house is valued at €170,000 and the stock and machinery at €106,000. John intends to retain the farmhouse for his own occasional use.
I was requested by John's solicitor to provide confirmation that John would qualify for Agricultural Relief.
John appears to tick all of the boxes for qualification for Agricultural Relief in that he comfortably passes the 80pc farm asset test and he intends leasing to a full-time farmer.
In most circumstances satisfying these two conditions would secure eligibility - but in John's case not so.
Because he is not going to farm the land himself, but rather he is going to lease it to a qualifying farmer, he is subject to satisfying the 75pc condition as referred to above.
He has no use for the stock and machinery and these will have to be disposed of.
Furthermore, because he is not going to farm the holding and reside in the farmhouse, the house no longer qualifies as being in use for qualifying farming purposes.
As the house, land and stock comprise 32pc of the total, the land only makes up 68pc, thereby falling well short of the 75pc minimum limit.
This particular condition only came into play in the 2014 legislation - where successors were allowed to lease out the farm to a qualified or full-time farmer.
Any person contemplating succession, particularly where the farm is likely to be leased out, would need to be mindful of this 75pc rule.
In this particular case John will face a tax bill of €186,780 if he fails to qualify for Agricultural Relief.
The beneficiary, John in this case is limited in his options for the reason that he does not intend to farm the land himself. However, there are a number of actions that could be considered such as:
- Revisit the land and dwelling valuations and see if there is any legitimate scope for adjustment. Valuers often tend to err on the side of caution by pitching land values towards the mid or lower end of the current market value spread in anticipation of a possible tax liability arising, whereas in this case the higher the land value, the better in terms of exceeding the 75pc threshold.
- Consider reinvesting the proceeds of sale of the stock and farm machinery on the farm in, say, a new farm building. This would mean that the 75pc threshold could be satisfied.
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, som.ie
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