“I am a landowner with 20ha of mixed forestry at year 15. I have four adult children, two of whom are residing permanently abroad. The children are interested in retaining the forestry, but not in a position to take on day-to-day management. What is the best way to pass it on taking into account tax, management and any other issues?”

The budget last week saw the removal of forestry from the high earners income restriction, which has restored its tax-free status to the pre-2007 situation. Profit from forestry is once again tax exempt for active farmers. Turning to your specific query, some factors which you need to consider are as follows:

  • Do you transfer the forestry now or leave it under your will? This decision will be dictated by such things as whether you will qualify for tax reliefs for a lifetime transfer so that no tax arises on the transfer or whether you have sufficient income outside of the forestry income to live off if you no longer own the forestry.
  • Do you transfer the forestry to one child or some or all of your children? Again, this will depend to a certain extent on the tax reliefs available and also whether you have other assets to leave to the other children if you decide that one child will inherit the forestry. Given the amount of forestry involved, the fact that no child appears to be farming or interested in taking on the day-to-day management, that some of the children are living abroad and the risk of disagreement among children where property is co-owned, it may be advisable to leave it to one child. It is worth highlighting that a child is not entitled to receive any assets under a will; only a surviving spouse is entitled to a legal right share. The Succession Act provides a mechanism for a child to challenge a will if they feel they have been unfairly treated. The act allows the court to make provision for a child where it is of the opinion that the testator failed in his moral duty to make proper provision for the child in accordance with his means.
  • Will the child/children qualify as farmer(s) in order to get the farmer rate of payment? While there is no longer a distinction between farmers and non-farmers under the new contracts, given that you have advised that you have drawn down 15 years of forestry payments, the contract which your child/children would be inheriting would still differentiate between the farmer and non-farmer rate. Thus to get the higher payment, the new owner should be a farmer and the Forest Service must be notified before the transfer can take place.
  • Who will manage the forestry? I understand that while forestry companies can manage the forestry on your behalf, they are generally only interested in forests from which they can get good returns where they will typically take 5% to 10% from the sale of the timber. Another factor which dictates the type of returns from harvesting is the location of the forest. It may be worth contacting your local forestry company to enquire whether they would be prepared to manage it and the approximate charge for same.

    • From a tax point of view, there are three taxes that will apply where a person transfers a farm to a successor during their lifetime:

    Capital gains tax (CGT)

    Capital gains arising on the sale of standing timber are exempt from CGT. Where land is transferred with timber standing on it, the proceeds must be apportioned and the part of the proceeds referable to standing timber excluded from the computation in relation to the disposal of land. It may be possible to claim retirement relief in respect of the underlying land. In order to claim retirement relief, the person transferring the farm must be 55 years of age or over and have owned and farmed the land for 10 years prior to transfer. Assuming you qualify for the relief, the transfer will not give rise to CGT.

    Capital acquisitions tax

    Children can be gifted up to €280,000 worth of assets tax free from their parents during their lifetime. However, if they qualify for agricultural relief, they can be gifted the equivalent of €2.8m worth of agricultural assets tax free from parents during their lifetime. Trees and underwood are included in the definition of agricultural property, provided they are growing on the land. Crops or trees that have been harvested would not qualify for the relief, thus the timing of the gift/inheritance should be considered to take account of harvesting.

    In order to claim agricultural relief, 80% of the child’s assets after receiving the gift/inheritance must be made up of agricultural property.

    For transfers from 1 January 2015, a further condition must be satisfied in that the person receiving the gift must spend not less than 50% of his/her time farming the land for a period of six years from the date of the gift/inheritance. In a forestry situation where it does not require 50% of normal working time to be spent on farming activities, Revenue will take this into consideration.

    Stamp duty

    Again, there is a partial relief from stamp duty in that it does not apply to the value of any trees growing on the land. Stamp duty at the rate of 2% will apply to the value of the underlying land. However, you can avail of a 1% rate under consanguinity relief if the transfer occurs on or before 31 December 2015.