Farm Ireland

Wednesday 21 February 2018

Tax reliefs make land leasing a logical option

Renting land is a cost-effective approach for dairy expansion

Tax reliefs are available for leasing your land.
Tax reliefs are available for leasing your land.
Farmers Handbook
Martin O'Sullivan

Martin O'Sullivan

Since the abolition of milk quotas - which happened to coincide with a 50pc increase in the tax exemption on rental income from leased land - interest in leasing land has heightened considerably. This is most apparent in areas best suited to dairy production.

Despite the current depressed milk price, farmers are still willing to pay attractive rents for access to additional land on a medium to long term basis.

These farmers know that prices for dairy commodities are cyclical and, as sure as night follows day, prices will recover. When the upturn happens they want to land on the ground running. The improvements in the tax treatment of land lease income as announced in the October 2014 budget followed recommendations from the Government's Agri-Tax Review Group.

This suggests that Government policy is four square behind providing tax incentives to accelerate land mobility and land owners have the security of knowing that the tax relief will remain in place for many years to come. Allied to the improved Income Tax exemption thresholds, the period for which a farmer can lease his/her lands without damaging their entitlement to Capital Gains Tax Retirement Relief was extended from 15 to 25 years. All in all, land leasing is very much in favour with the Department of Finance.

Tax Relief

Tax relief is available for various lengths of lease for an individual landowner. A spouse or civil partner is also entitled to the relief so if the land happens to be in joint names or if the spouse/civil partner has land to lease separately, well then both parties are entitled to the relief.

Where the annual rent exceeds the allowable limit there may be a case for transferring the lands into joint names. It should be noted that the relief refers to Income Tax only and not PRSI or Universal Social Charge so the rent has to be declared on your annual tax return.

Eligible leases

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To qualify for the tax exemption, a qualifying lease does not have to be a formal legal lease but it must be evidenced in writing.

The document must contain the names and addresses of the lessor(s) and lessee(s), the acreage, address, location and so on of the land which is the subject of the lease, the terms of the lease, the duration of the lease which must be at least five years and is signed by the parties.

As a general recommendation, a formal lease should be drawn up in all cases, stamped with Revenue and registered with the Property Service Regulatory Authority. This ensures that both the land owner's and tenant's rights are protected.

Eligible tenants

The table sets out the various parties that do and don't qualify as eligible tenants.

There are very few conditions for qualifying as an eligible landowner (lessor). The landowner must have title to the land but does not necessarily have had to farm it previously. The lower age limit of 40 years that existed up until December 31 2014 no longer applies.

Leases and farm entitlements

Where Basic Payment Scheme entitlements are leased along with the land, the tax relief also covers that part of the rent that relates to the entitlements.

Farmers who are leasing their entitlements in 2016 should seek the advice of their Agricultural Advisor/Consultant before entering into any agreement as the 2016 Basic Payment Scheme is likely to contain changes that lessors will need to be advised on.

Farm consolidation

Farmers who have out-farms some distance from the home farm could consider leasing out such farms and leasing land closer to home.

Apart from assisting farm consolidation, this would have the added benefit of the rent which he/she receives being tax free and the rent he/she pays out as being tax deductible.

Assuming the land leased in is equal or greater in area that the land leased out, there should be no negative implications for the Basic Payment.

Martin O'Sullivan is the author of the ACA Farmers Handbook. He is a partner in O'Sullivan Malone & Company, Accountants & Registered Auditors. Ph: 051 640397

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