The Commission on Taxation and Welfare’s proposals to reduce the allowances farmers receive when transferring agricultural assets to family members have caused a bit of consternation.
The commission advocates reducing the tax-free threshold from the current level of €355,000 for parent to child transfers. It also recommends reducing the level of agricultural relief from the current 90%.
At the outset, it needs to be pointed out that this is a wide-ranging document, with almost every aspect of the current taxation system considered across 547 pages. This is not a witch hunt against farmers.
The second thing to note is that this is not a change of direction in taxation policy. The recommendation would be a continuation of a previous cut. Capital acquisitions tax (CAT) itself has changed. It was only 20% during the Celtic Tiger years, then was hiked up to 40% as the public finances collapsed. The current rate is 33%.
The CAT threshold was over 500,000 at the height of the boom in 2008, when asset value peaked.
Land values rose in an unprecedented way in the decade around the turn of the century.
A few examples from around where I live in Co Wexford epitomise that.
In 1998, land adjoining land of ours was sold for IR£5,000/ac, which caused quite a stir.
Four years later, land even closer to home made almost €10,000/ac, a rapid rise in price, even allowing for the change in currency.
That was early 2002. In 2007, there were three auctions in quick succession around us. Two were of large farms that hadn’t been farmed too hard in recent years.
One saw 313 acres sold for €5m, which is almost €16,000/acre. The second saw 273 acres make €8.2m, €30,000/ac.
But that doesn’t even come close to being the top of the local market. In May of 2007, 37 acres was sold in four different plots for €1.485m a mile up the road on the Bunclody side.
That’s a whopping €40,000 an acre. It represents an eight-fold increase in land price in less than a decade.
Of course, they aren’t average land prices, but they are the prices that get the headlines and can influence public opinion.
The CSO figures for average land sale prices are probably a more reliable indicator than selected land sales in the parish of Ferns.
According to the CSO, the average land price across the country for this time 30 years ago was €1,840/ac. Note that the figure, which is for July-September 1992, is in euros, not Irish pounds, which was the currency at the time. The CSO carried out the conversion to euro.
That was a little under the average prices for other three-month periods around it, but it’s fair to say that land was hovering around the €2,000/ac mark around then.
By 1997, five years later, the average price for the third quarter of the year was €3,240 - an increase of over 50%.
Fast forward another five years, and the Tiger is starting to roar, with the average price for the July-September 2002 period up to €5,628.
That’s a three-fold increase in only a decade, a land inflation rate of 30% per annum.
For some reason, I can’t access the CSO’s land price data from 2005 up to 2013, when it has switched from a quarterly figure to an annual one.
Fortunately, the Irish Farmers Journal land price survey began with the 2007 year’s sales, so I can continue my five-year updates. According to our own analysis, the average land price in 2007 was (drum roll) … €20,238/acre.
That, ladies and gentlemen, is a near four-fold increase in five years. It means that in 2007, at the height of the boom, an acre of land cost what you would have bought you an 11-acre field (on average) in 1992.
It’s an astonishing level of price inflation. Even allowing for the inevitable divergence between one survey and another.
It wasn’t sustainable, of course. The Tiger crashed, and in 2008, prices had fallen to €15,867/ac. The following year, the average price of an acre of land had fallen to €10,222. Land prices bottomed out at €8,700/ac in 2011.
Since then, prices have been pretty steady. The most recent Irish Farmers Journal land price survey showed the average price to be €11,906/ac.
That still leaves farms with a significant tax burden under the current rules, were it not for agricultural relief.
I’d better qualify that statement. If we take the average farm 35ha, and give it a value of even €20,000/ha (8,000/acre) the farmland alone is worth €700,000.
Then add in sheds, machinery, livestock, it isn’t hard to go over €850,000.
That leaves half a million euro above the current CAT threshold of €355,000 for a parent to child transfer.
With the tax rate at 33%, you’re looking at a CAT tax bill in the region of €165,000 without agricultural relief.
With the average farm income running at €34,000 last year (a good year), that’s the equivalent of every penny in farm income - pre tax - going in paying inheritance tax. For five years. That’s a crippling burden for any young farmer starting out.
However, it’s the second part of the opening recommendation from the Commission on Taxation and Welfare that really caught my eye.
“The commission recommends that the level of agricultural and business relief available for capital acquisitions tax be reduced and that the qualifying conditions for both reliefs be amended to incentivise, and ensure active participation in the farm or business by the recipient.”
The commission wants to see changes that make it harder for people to qualify for these reliefs. I’ll be honest, I do too.
The justification for agricultural relief is entirely founded on the vast gap between the market value of an acre of land and its earning power.
The example of the average farm with the average income given above shows that in stark terms. It’s a compelling argument.
Of course, if a person sells land, whether it was acquired through inheritance or purchase, they pay tax on the sale, and rightly so.
This is about minimising the tax burden on the generational transfer of a multi-generational asset, a family farm, when the purpose of the transfer is to ensure the continuation of that family farm for another generation.
The danger is that land would become an attractive option for the intergenerational transfer of wealth by non-farming interests.
Land’s enduring nature makes it a solid long-term investment before any taxation issues are considered.
As the old saying goes, they aren’t making any more of it (except the Dutch).
At times of volatility, land becomes an ever-safer nest egg. And people with significant wealth are always looking for safe places to store their money.
Add in a benevolent tax regime, and you create a dynamic where actual family farmers will find themselves competing with people with no background in farming, but very deep pockets.
Maybe they’ll have watched Clarkson’s Farm and fancied themselves as part-time farmers.
More likely, they will have been advised by their team of accountants that farmland + active farming + young trained farmer with no more than 20% of non-agricultural assets = a multiplier effect that inflates the value of assets that can be transferred without any CAT liability tenfold.
We need to raise the bar
There is the danger that a low bar for agricultural relief actually makes land unaffordable for the typical farm family.
This would be a classic example of the law of unintended consequences in action.
What can we farmers do about it? I’ve been thinking about that since doing a news piece on the Commission on Taxation and Welfare’s report for this week’s paper.
And this is just top-of-the-head thinking. But here goes.
An active farmer does many things. They buy and sell livestock, they buy fertiliser and feed and seed and pesticides and fencing equipment.
They go to open days and farm walks and discussion groups and farmer meetings. They apply for schemes and carry out actions in accordance with those schemes. They order tags and weigh calves and take dung samples and measure grass and soil sample and TB test.
Of course, very few farmers do all these things. But most farmers do many of these things. And any younger farmer should be doing most of these things. And every younger farmer has a smartphone.
So perhaps the Department should establish a checklist of things that farmers are and should be doing in the normal course of their daily and annual routine.
Maybe as many as 100 things. And it would be required that any active farmer, to be regarded as eligible for agricultural relief, should have to verify that they are doing a certain threshold of these mundane and routine activities.
In short, we need to make it more bother than it’s worth for a non-farmer to fake such a level of involvement.
And these tasks would be spread over the calendar, so a young hotshot can’t rock down to the farm for a few days and run around verifying themselves doing a year’s worth of work in a week.
Before you say that it’s too much to ask of all farmers, I would suggest that there is a lot at stake.
Firstly, we need to show the Commission on Taxation and Welfare that we share its concern that agricultural relief is only available to active participants in the farm.
Secondly, land is dear enough without having to bid against a bunch of millionaires who see it as “collectable”.
The Department has a new app, Agrisnap, that allows a person to take a photograph that is geotagged - that shows it is taken from a precise location.
I had to use it a couple of weeks ago to show that I had indeed planted a crop of oats in a field that had previously been in grass.
The app was a little fiddly to access, but once I was in, it was simply a matter of going to the field and taking a photograph.
So we already have technology that allows a person to show that they are on their farm doing their work.
Perhaps you think that’s a stupid idea. Perhaps you are correct.
But if we as farmers don’t propose something, we risk having others imposing their views on what constitutes an active farmer.
So what’s your big idea? Like I said earlier, there’s an awful lot at stake for family farmers and family farms.