Farmers selling land and property bought between the end of 2011 and 2014 can make significant savings on Capital Gains Tax
Did you purchase property between December 7, 2011 and December 31, 2014? If so, then you may be entitled to substantial tax savings on gains arising from the disposal of that property.
An often overlooked relief on Capital Gains Tax (CGT) was introduced in Finance Act 2012. This CGT relief was introduced as part of the government stimulus plan to encourage development of the Irish property sector.
The relief offered investors, including farmers, who purchased property in the European Economic Area during the relevant period an opportunity to sell the property tax-free within seven years.
Originally the relief was provided on the condition that investors held the property for a minimum of seven years.
However, the Finance Act 2017 reduced the minimum holding period to four years.
This meant that properties bought within the relevant period could then be sold tax-free after January 1, 2018 and the full exemption from CGT would continue to be available until the ownership period reached seven years.
However, once the ownership period of the property exceeded seven years, only proportionate relief is available
This is best illustrated by a case study.
John purchased 100 acres in July 2014 for €1,000,000.
In December 2020 he received an offer of €1,750,000 for the land. Without the CGT relief (and ignoring other possible reliefs), John would be liable to CGT at 33pc on the gain of €750,000.
This would result in a CGT liability of approximately €247,500.
However, as John had purchased the property between December 7, 2011 and December 31, 2014, he is entitled to claim relief under the four to seven-year CGT relief.
As John has held the property for more than four years and less than seven years, the gain becomes fully exempt from CGT. This provides a significant tax saving of €247,500.
Proportional Relief — seven plus years of ownership
Let’s assume John decided not to sell the property in December 2020 and retains it until July 2024.
At the time of disposal in July 2024 he will have owned the property for 10 years.
At that point, the CGT relief will only provide proportional relief on the gain for seven years of ownership years (7/10ths).
Assuming the property has not increased in value over the final 3.5 years, the taxable gain for the 3.5 years is €225,000 and at 33pc CGT, John is liable to pay a tax bill of €74,250 on the sale.
As you can see from this example, it is crucial that property owners who qualify for this four to seven-year CGT relief manage the timing of sales correctly to minimise their exposure to capital gains tax on a disposal.
Where enhancement expenditure (including the construction of buildings on land or the completion of partially constructed buildings) is incurred at any time during the period of ownership and forms part of the relevant property, then the gain relating to the whole property would be entitled to the relief.
This expenditure need not have been incurred prior to December 31, 2014 to avail of the relief.
There are however some conditions that restrict property owners from claiming the relief:
Where property is acquired from a relative (e.g. brother, sister, parent, grandparent, aunt, uncle, niece, nephew) the individual who acquired the property must have paid consideration amounting to at least 75pc of the market value of
the property at the time it was acquired in order to qualify for the CGT relief.
Any income, profits or gains generated from the property — for example, rental income — within the seven-year period must come within the charge of Irish income tax or corporation tax.
If such income would is not within the charge of Irish income tax or corporation tax, then the relief is not available.
Finally, the transaction must not come within the anti-avoidance provisions relating to artificial CGT losses.
Brian Harty is a Chartered Tax Consultant based in Cloyne, Co Cork email: email@example.com