Last week in this publication, we ran an article on the points to consider if leasing out farmland. We received a number of queries regarding the tax exemptions available to landowners considering leasing out their farms.
Austin Finn from the Land Mobility Service took the time to answer the two most common questions in more detail.
Q: How do the tax exemptions work if you have a number of different leases with different term lengths? What if you owned the land jointly with your spouse?
A: The thresholds for income tax exemption for long-term five-plus-year leases taken out on or after 1 January 2015 are:€18,000 where all the qualifying leases are for five or six years.€22,500 where all the qualifying leases are for seven but less than 10 years. €30,000 where all the qualifying leases are for 10 but less than 15 years.€40,000 where all the qualifying leases are for 15 years or more.
The income tax reliefs are per land owner, they are annual and certain conditions must be met for a lease to qualify.
If a land owner has a number of different leases, the exemptions and lease values are cumulative.
If an owner has three seven-year qualifying leases with different farmers and the combined lease values of the three leases is €22,000 per year, the full € 22,000 is exempt from income tax.
However, if the combined annual lease value is €24,000, the annual income tax exemption is capped at €22,500.
The annual income tax relief is per land owner, so if land is jointly owned (two land owners), the thresholds are doubled.
A retiring farming couple who jointly own the farm could receive up to €80,000 per year income tax-free, should they enter into a qualifying 15-year lease.
Q: I am thinking about retiring from farming and am really considering leasing my land to another farmer long term to avail of the income tax exemptions. My only concern is if I transfer the land to my children in the future, will they have a large tax bill to pay because we are no longer farming the land?
A: Entering into a long-term lease does not affect the capital tax reliefs available to farmers.
The two main capital taxes to consider when transferring or disposing of a farm are capital gains tax (CGT) and capital acquisitions tax (CAT).
CGT can apply to the disposer should a land owner decide to sell or transfer his/her farm during his/her lifetime.
Any land owner over the age of 55 who has farmed the land for at least 10 years qualifies for CGT retirement relief – they can have leased the land for up to 25 years subsequent to the 10 years farming and still qualify for this relief.
CAT is payable by the recipient of the farm (farm land, farm assets, agricultural assets).
The most important relief for any recipient of an agricultural asset to try to avail of is CAT agricultural relief. To secure this relief, the recipient must satisfy an 80% asset test. This means that upon receipt of the asset, 80% of their assets are agricultural.
To hold this relief the recipient must either actively farm themselves for six years or lease the farm to an active farmer for six years or a combination of both.
The definition of active farming in this regard is to demonstrate 20 hours per week work on the farm. If the person has a Green Cert, there is no requirement to be able to prove hours worked.
If a person qualifies for this relief, the value of the asset transferred is reduced by 90% for CAT purposes, with this reduced value and the available tax-free threshold (currently €320,000 parent to child cumulative) no CAT should apply.
Whether or not the farm is leased prior to the transfer does not affect CAT agricultural relief.
In fact, having a qualifying lease in place can help, especially for non-farming recipients, as extending the lease for up to six years post-receipt helps them qualify for the CAT agricultural relief.