If the farm consists predominantly of buildings, such as intensive pig or poultry units, the tenant would have a right to renewal of the lease at market value after a lease term of five years or more. A way to get around this is by granting a lease of the land only and granting either a licence or a letting for the temporary convenience of the landowner for the buildings on the land. In these circumstances, the tenant would not have a right of renewal after five years.
A solicitor acting for a landowner will protect his/her interests in drawing up the lease.
What about the Single Farm Payment?
If a landowner was to lease out land on which he/she has been claiming entitlements, he/she could sell the entitlements to another farmer or he/she could lease the entitlements to the tenant. It is common for a tenant to pay back a landowner the value of his/ her SFP as part of the rent.
As regards the longer-term status of the SFP after 2013, there are no detailed proposals as yet. Even if a landowner continues to farm the land until after CAP 2013 reform, it could be difficult for him/her to lease the land and retain his/her direct payments as Commissioner Dacian Ciolos has signalled that the policy needs to be focused on 'active farmers'.
Can I just let the farm on a yearly basis?
As I mentioned earlier, it is often best to try out an arrangement on a short-term basis first before committing to anything longer term. If the arrangement goes well I would encourage a landowner to enter a longer-term arrangement for the following reasons:
- It is often thought that a landowner can earn up to €20,000 in rent, income-tax free, when the lease is for 10 years or more, but this is not strictly the case. Income from leasing is subject to the universal social charge. For example, if a landowner, aged 60 years with an off-farm income, who is liable to pay tax at 41pc, leases out his land and entitlements for 10 years for €20,000 a year availing of the income tax exemption for leasing farmland, he can keep €19,280 of it a year and not the full €20,000.
If, on the other hand, the landowner decides to let it on the 11-month system for €20,000 a year, he keeps €11,080 a year and pays €8,920 a year in tax and universal social charge. Over the 10 years, he is better off by €82,000 under a 10-year leasing agreement rather than letting it out yearly.
- A tenant is likely to take better care of the land if he/she has it for a longer period, eg fencing, fertiliser, grazing and management.
- There is an administrative burden in having to arrange a lease of entitlements and renegotiating rent and other provisions on a yearly basis.
What about the availability of Capital Gains Tax Retirement Relief?
If the land passes on the death of the landowner, no capital gains tax arises.
If a landowner is planning on transferring his/her land during his/her lifetime to a child or 'favourite niece or nephew', he/she can lease the land for up to 15 years and have no capital gains tax to pay on the transfer, provided he/she has owned and farmed the land for 10 years prior to the lease.
If the landowner wants to sell the land to someone other than his/her child or 'favourite niece or nephew', he/she should not lease it out at present. He/she could look at other options, such as entering a share farming arrangement or a milk production partnership with another farmer. John signed up to a 10-year lease last week, which will be reviewed after five and seven years, and said that he will be advising his friends to do the same.
Having a detailed lease agreement, which tries to cover anything that might arise between the landowner and the tenant, is the key to a long and happy leasing arrangement.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, solicitor and tax consultant Aisling Meehan does not accept responsibility for errors or omissions howsoever arising.
Aisling Meehan is a qualified solicitor and tax consultant from Rathlahine Farm, Newmarket-on-Fergus, Co Clare .Tel: 061 368 412. Oliver Ryan-Purcell, a solicitor and accredited mediator, practises as a consultant solicitor to Aisling Meehan