Farm Ireland

Saturday 16 December 2017

Save tax on rental incomes

Michael Hough

There are many farmers who are considering retiring from farming who do not have a farm successor. These farmers will generally let their land to other farmers in their area.

However, letting land on the 11-month system is not always an attractive proposition for the farmer who wants certainty relating to the land that he has available to him each year. Consequently leasing land for a number of years has become much more popular in recent years.

The tax relief on leases also makes it more popular for the land owner. These are significant depending on the period of the lease (see table 1).

However, there are a number of conditions that need to be met in order for the lease to qualify for these tax exemptions.

  • The land owner must be 40 years of age or older, or be permanently incapacitated by mental or physical infirmity so as to be unable to carry on a farming enterprise.
  • The lease must be in writing and for a period of at least five years. In addition, it must be in relation to the farm land and not farm buildings that are used for other purposes.
  • The farm land must be leased to an individual who is not 'connected' with the owner. In this case, a nephew or neice or a cousin would not be deemed to be a 'connected' individual.
  • The individual to whom the land is leased must use the land for his/her farming enterprise. This can be a sole trader or in a partnership, but not in a company.

The only problem with leasing from a land owner's view is when it comes to passing it on to the next generation.

In most cases where there is no 'farmer successor', it is likely that the successor will have built up some assets of his/her own.

This may create a problem for the successor qualifying for agricultural relief which reduces the value of farm land to 10pc of its market value for gift or inheritance tax purposes.

In order to qualify for agricultural relief it is necessary that at least 80pc of the successor's assets are made up of land (including farm buildings), livestock, bloodstock and farm machinery.

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Obviously, it is not always possible for successors to qualify for this relief, particularly now that there has been a significant reduction in the value of land.

The alternative is to avail of business relief which also operates to reduce the value of land to 10pc of its market value for gift and inheritance tax purposes. Its advantage is that there is no '80pc test'.

But while business relief is now available in respect of land that has been let on a conacre basis, it does not extend to land which has been leased.

Irish Independent