“My cousin and I farm in two separate farms and herd numbers but farm very closely and have a very good working relationship. My cousin is planning to buy a farm of 60 acres with the aim of reducing the fragmented nature of his current holding. He is not willing to sell the old ground due to it being his father’s farm but cannot afford to farm the whole lot due to time and infrastructure constraints. If I lease the old block of ground on a five- or 10-year lease is he entitled to this lease money tax-free or does the tax-free leasing only apply if you cease farming?”
I have received several queries of late regarding the income tax relief for long-term leases. The level of interest in long-term leasing has increased significantly given the enhanced tax incentives introduced in Budget 2015. The budget removed the requirement for the lessor to be 40 years or more or permanently incapacitated from carrying on a trade of farming in order to qualify for the tax relief. Consequently, your cousin does not have to cease farming in order to claim the relief.
Extent of relief
For leases entered into on/after 1 January 2015, the amount of income that may be exempted under a qualifying long-term lease is as follows:
€40,000 where the qualifying lease is for 15 years or more.€30,000 where the qualifying lease is for 10 but less than 15 years.€22,500 where the qualifying lease is for seven but less than 10 years.€18,000 where the qualifying lease is for five or six years.However, the rental income is subject to PRSI and the Universal Social Charge.
Basic Payment Scheme payment
Where a farmer leases both his land and the Basic Payment Scheme (BPS) entitlements, the entire amount received will qualify for relief subject to the overall limits. It is common for a farmer to pay back a landowner the value of his/her BPS as part of the rent and this payment will qualify as rent for the purposes of claiming the relief.
Land owned jointly
If the land is owned by more than one person, such as between a husband and wife or siblings, each joint owner is entitled to claim the exemption in their own right, eg a husband and wife can claim €80,000 rent tax-free each year where the land is owned jointly and the lease is for 15 years or more.
Land lease between relatives
The person leasing the land must not be connected to the owner of the land. Guidance on the issue suggests that a lessor is not entitled to the relief where land is let to:
(a) Immediate family (eg grandparents, parents, brothers, sisters, children, grandchildren, etc).
(b) A spouse or civil partner or the immediate family of the spouse or civil partner.
However, a cousin is not deemed to be connected; consequently, leases of land between cousins should qualify for the relief.
I understand that a number of farming organisations have lobbied for the relief to be extended to leases between parents and children. We will have to wait for the budget announcements on 11 October 2016 to see whether it is extended.
Land swap via lease
An anti-avoidance measure was introduced in the last budget which prevents perceived exploitation of the relief. The measure provides that a lease shall not qualify for relief in circumstances where the person effectively swaps land with another person or where the land is farmed in whole or in part by the landowner.
For example, if you leased land from your cousin which bounds your farm and he leased land from you which bounds his farm, the leases may not qualify for the relief notwithstanding the fact that it would reduce fragmentation for you both. That said, there is a relief available from CGT called Farm Restructuring Relief if you swapped the land between you by legal transfer.
Farm restructuring relief from CGT
CGT currently at the rate of 33% is payable on a gain arising from the disposal of land which includes swapping land parcels. However, full relief from CGT may be given if a person qualifies for restructuring relief and the price paid for replacement land is greater than the price received for selling land. Where the price paid for replacement land is less, partial relief will be given.
The initial sale/purchase for the purposes of restructuring must occur between 1 January 2013 and 31 December 2016. The subsequent sale/purchase must occur within 24 months of the initial sale/purchase. Consequently, if your cousin wishes to avail of this relief, he should ensure that he acts before the relief is abolished at the end of the year.
While the income tax incentive encourages many to lease their land long-term, there are many other considerations in leasing land long-term, including practical, legal and tax considerations and landowners should ensure that they get advice in respect of all aspects before making a decision.
“My cousin and I farm in two separate farms and herd numbers but farm very closely and have a very good working relationship. My cousin is planning to buy a farm of 60 acres with the aim of reducing the fragmented nature of his current holding. He is not willing to sell the old ground due to it being his father’s farm but cannot afford to farm the whole lot due to time and infrastructure constraints. If I lease the old block of ground on a five- or 10-year lease is he entitled to this lease money tax-free or does the tax-free leasing only apply if you cease farming?”
I have received several queries of late regarding the income tax relief for long-term leases. The level of interest in long-term leasing has increased significantly given the enhanced tax incentives introduced in Budget 2015. The budget removed the requirement for the lessor to be 40 years or more or permanently incapacitated from carrying on a trade of farming in order to qualify for the tax relief. Consequently, your cousin does not have to cease farming in order to claim the relief.
Extent of relief
For leases entered into on/after 1 January 2015, the amount of income that may be exempted under a qualifying long-term lease is as follows:
€40,000 where the qualifying lease is for 15 years or more.€30,000 where the qualifying lease is for 10 but less than 15 years.€22,500 where the qualifying lease is for seven but less than 10 years.€18,000 where the qualifying lease is for five or six years.However, the rental income is subject to PRSI and the Universal Social Charge.
Basic Payment Scheme payment
Where a farmer leases both his land and the Basic Payment Scheme (BPS) entitlements, the entire amount received will qualify for relief subject to the overall limits. It is common for a farmer to pay back a landowner the value of his/her BPS as part of the rent and this payment will qualify as rent for the purposes of claiming the relief.
Land owned jointly
If the land is owned by more than one person, such as between a husband and wife or siblings, each joint owner is entitled to claim the exemption in their own right, eg a husband and wife can claim €80,000 rent tax-free each year where the land is owned jointly and the lease is for 15 years or more.
Land lease between relatives
The person leasing the land must not be connected to the owner of the land. Guidance on the issue suggests that a lessor is not entitled to the relief where land is let to:
(a) Immediate family (eg grandparents, parents, brothers, sisters, children, grandchildren, etc).
(b) A spouse or civil partner or the immediate family of the spouse or civil partner.
However, a cousin is not deemed to be connected; consequently, leases of land between cousins should qualify for the relief.
I understand that a number of farming organisations have lobbied for the relief to be extended to leases between parents and children. We will have to wait for the budget announcements on 11 October 2016 to see whether it is extended.
Land swap via lease
An anti-avoidance measure was introduced in the last budget which prevents perceived exploitation of the relief. The measure provides that a lease shall not qualify for relief in circumstances where the person effectively swaps land with another person or where the land is farmed in whole or in part by the landowner.
For example, if you leased land from your cousin which bounds your farm and he leased land from you which bounds his farm, the leases may not qualify for the relief notwithstanding the fact that it would reduce fragmentation for you both. That said, there is a relief available from CGT called Farm Restructuring Relief if you swapped the land between you by legal transfer.
Farm restructuring relief from CGT
CGT currently at the rate of 33% is payable on a gain arising from the disposal of land which includes swapping land parcels. However, full relief from CGT may be given if a person qualifies for restructuring relief and the price paid for replacement land is greater than the price received for selling land. Where the price paid for replacement land is less, partial relief will be given.
The initial sale/purchase for the purposes of restructuring must occur between 1 January 2013 and 31 December 2016. The subsequent sale/purchase must occur within 24 months of the initial sale/purchase. Consequently, if your cousin wishes to avail of this relief, he should ensure that he acts before the relief is abolished at the end of the year.
While the income tax incentive encourages many to lease their land long-term, there are many other considerations in leasing land long-term, including practical, legal and tax considerations and landowners should ensure that they get advice in respect of all aspects before making a decision.
SHARING OPTIONS