Question: I’m in my late sixties, and I stepped back from the farm a couple of years ago. The herd number is in my son’s name now, and he is doing everything. I still own the land though. A neighbouring farmer has been asking about leasing a few acres that would suit him better than me, and I’m wondering whether that makes sense or whether I should just leave things as they are with my son. I don’t want to end up with a tax problem when it comes to passing on or if I had to eventually sell the land.

Answer: You have actually set things up well, even if it happened gradually rather than as part of a plan. The herd number is in your son’s name, he is farming the land, and you own it. That is a clean position to be in and it gives you real options.

The first thing to understand is that both routes – leaving things as they are with your son, or leasing to the neighbour – can work from a tax point of view, but they work differently. Which one is right for you depends on what you intend to do with the land.

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Retirement Relief

The foundation for either route is that you owned and farmed the land yourself for at least ten years. That prior farming period is what qualifies the land for Retirement Relief when you eventually sell or transfer it. Retirement Relief is an exemption from Capital Gains Tax. If you have been farming this land for most of your life before stepping back, that box is already ticked.

Where you are now – your son farming the land informally with the herd number in his name – is what the tax legislation refers to as letting to a child. There is no formal lease, the land is being worked by your son, and when the time comes to transfer it to him, Retirement Relief will be available. That is the good news.

The downside of this arrangement is that because your son is closely connected to you, the income tax exemption on any rent does not apply. In practice, if you are not charging rent and your aim is to eventually give the land to your son, that may not matter to you at all. But if you were hoping to get a tax-free income from the land, this route does not deliver that.

If you lease some or all of the land to the neighbour instead, you get two things. First, Retirement Relief is still available when you eventually sell or transfer the land, provided the lease is to an unconnected party and you owned and farmed the land for 10 years beforehand. If you purchased rather than inherited the land, there is also a seven-year ownership condition to satisfy, but for most farmers in your position that will not be an issue.

Second, and this is the real advantage of this route, the rental income can be substantially exempt from income tax. The exemption increases with the length of the lease, and for someone in your position the saving can be significant.

Short-term lease

A short-term lease of five to seven years gives a lower exemption: a longer lease gives more. Your tax adviser can run the numbers based on the rent the neighbour is proposing. Retirement Relief would still be available if you transfer the land to your son.

So the decision comes down to this. If the land is going to your son and you have no interest in generating a rental income in the meantime, leave things exactly as they are. The tax position is sound and the transfer to your son will be straightforward.

If you want to generate an income from the land while you still own it, lease it to the neighbour. Do it properly – with a written lease, the right term, to an unconnected party – and you will get a meaningful income tax saving on the rent without giving up your Retirement Relief on a future sale or transfer.

Marty Murphy, Head of Tax, ifac.

Tax efficient

One separate point worth checking: does your son hold a farming qualification or is he spending sufficient time on the farm? That is relevant to Agricultural Relief – the relief that removes or reduces inheritance and gift tax when the farm transfers. It is a different relief to Retirement Relief, and it is your son who needs to satisfy the conditions rather than you. If he does, the transfer to him should be very tax efficient from both sides.

You are in a better position than most people who come to me with this question.

The main decision is whether you want a rental income from the land or not. If you do, lease to the neighbour and structure it correctly. If you don’t, stay as you are.

Marty Murphy is head of tax at ifac, the professional services firm for farming, food and agribusiness