Agri Tax Review: Focus on existing tax incentives

Following Ministerial concerns that farmers are not as aware of the range of tax incentives aimed at the farming sector as they could be, we look at some of the measures currently available

Capital gains tax retirement relief

Typically when a farmer sells or transfers land (without payment) to the next generation, a liability to CGT arises. CGT at a rate of 33% arises on the uplift in value of the land from when the farmer acquired it to when he disposes of it. However a special relief called CGT retirement relief results in the vast majority of farms being transferred free of CGT. In order to qualify for the relief, a farmer must be 55 years of age or over and have owned and farmed the land for 10 years prior to transfer. However, a farmer can lease out their land for up to 15 years and still avail of CGT retirement relief, provided he owned and farmed it himself for 10 years before leasing it. Also, a farmer must formally lease land for at least five years to the same person to continue to qualify for retirement relief, except in cases where it is eventually transferred to a child,

From 1 January 2014, where the farm is being transferred to a child (or favourite niece/nephew), and the farmer is 66 years of age or over, there is a cap of €3m on the value of assets which will qualify for CGT retirement relief. Where the farm is being sold or transferred to someone other than a child, the relief is limited to €750,000 or €500,000 where the farmer is aged 66 years of age or over.

Capital acquisitions tax agricultural relief

Typically a child can be gifted or inherit up to €225,000 worth of assets tax free from parents during his/her lifetime. Anything in excess of this is taxed at 33%. However, a special relief called agricultural relief results in the vast majority of farms being transferred free from CAT. In order to qualify for the relief, the child must satisfy the ‘farmer test’. This is solely a financial test (no agricultural qualifications required) and requires that 80% of the assets of the child must comprise agricultural property after taking the gift/inheritance. If the relief applies, the market value of the agricultural property is reduced by 90% for tax purposes. For example, if the farm was valued at €1m and the child qualified for agricultural relief, the taxable value of the farm would be €100,000. As a child can be gifted/inherit up to €225,000 tax free, the child will have no CAT to pay on the transfer and will have €125,000 left of the tax-free threshold to set off against future gifts/inheritances from parents.

Stamp duty relief for young trained farmers

Currently a stamp duty rate of 2% applies on transfers of agricultural land. However, a special relief called consanguinity relief, which expires at the end of this year, reduces the rate of stamp duty to 1% on transfers of land between blood relatives. A special relief called young trained farmer stamp duty relief operates so that no stamp duty arises on a transfer. It can be availed of by young trained farmers with the ‘green cert’ or its equivalent who are under 35 years and undertake to spend not less than 50% of their time farming the land for five years after the transfer.

100% stock relief for young trained farmers

Currently 100% stock relief instead of the normal 25% is available to young trained farmers who are under 35 years of age and who meet certain training requirements. The young trained farmer rate provides 100% relief on any increase in stock values for the year in which the individual begins farming and for three successive years. For registered farm partnerships, the normal 25% rate of stock relief will increase to 50% and for certain young trained farmers entering such partnerships, a rate of 100% stock relief will continue to apply. The 2013 Budget curtailed the availability of 100% stock relief in respect of individuals seeking to qualify for the first time in the year of assessment 2012 or any subsequent year of assessment. Part of the qualification process now requires a business plan to be submitted to Teagasc for the purposes of claiming the relief, unless a business plan has otherwise been submitted to Teagasc or the Minister for Agriculture for any other purpose (e.g. an application under the New Entrants Scheme for Milk Quota). Furthermore the (cash equivalent) amount of stock relief at the 100% rate which can be received by a qualifying farmer, who first qualifies as such in the year of assessment 2012 or a subsequent year of assessment, is limited to €40,000 in a single year of assessment and €70,000 in aggregate over the course of the scheme (i.e. four years). Previously a farmer could claim an unlimited amount of stock relief at the 100% rate.

Long-term leasing income tax exemption

If a landowner aged 40 years of age or over leases his/her farm for five to seven years, the first €12,000 rent is exempt from income tax. For leases of seven to 10 years, the first €15,000 rent is exempt from income tax while for leases of more than 10 years, the first €20,000 rent is income tax free. However, the full amount of rental income is subject to the USC. If the land is owned by more than one person, such as a spouse, each joint owner is entitled to claim the exemption in their own right.

Farm restructuring relief

This relief will apply to a sale, purchase or exchange of agricultural land in the period from 1 January 2013 to 31 December 2015 where Teagasc has certified that a sale and purchase or an exchange of agricultural land was made for farm restructuring purposes.

A condition of the relief is that the interaction of the sale and purchase together must result in an overall reduction in the distance between parcels in the farm. Full relief from CGT will be given where the value of the land purchased or exchanged is greater than the value of the other land that is sold or exchanged. Where the value of the land acquired is less than the value of the land disposed of, marginal relief will apply. Stamp duty currently at the rate of 2% will apply to the purchase or exchange. It is specifically provided that the sale of an existing farm and the replacement of it by the purchase of another farm does not qualify for the relief.

Income averaging

Income averaging operates by giving the farmer the option of adding three years farming profits together and dividing by three in order to pay tax on the average taxable profit rather than on the actual profit. A farmer must be farming for at least three years before he can opt into the income averaging system and is obliged to remain in the system for a minimum of three years. Over a period of years, averaging smoothes profits and can be beneficial for cash flow in years of rising profits. Furthermore, the averaging of profits can remove profits otherwise taxable at the higher rate of tax into a lower tax bracket. However, the opposite applies where profits are falling and the farmer can face a higher tax bill than that if he were not on income averaging.

Further reliefs specific to the agri sector include:-

1. Farm Building Allowances

2. VAT Flat Rate Addition

3. VAT 58 Refund on Capital Expenditure

4. Carbon Tax Double Deduction