Reader writes

Succession has been a problem in Ireland for a long time and farmers are encouraged to have a plan in place. With that in mind, my father is proposing transferring the land to my brother. On enquiry, the cost of transferring the land is €20,000 while my father is alive and €10,000 to transfer on his death! It is ridiculous that it is more expensive to transfer the land while my father is alive than it would be on his death. Can someone please explain this anomaly?”

Aisling writes

I can only assume it is tax that is driving up the cost of the land transfer. In terms of legal fees, generally, it is much cheaper to transfer property while you are alive than leaving it under your will as part of your probate. That said, where land is being transferred from one active farmer to another, generally, no tax should be due. Thus I am a little surprised to see that you have been quoted more for a lifetime transfer than leaving property on death.

A lifetime transfer generally allows for a succession plan, or a conversation around the gradual shift of the farm from one generation to the next, and protections included for the parents through support and maintenance payments for the rest of their days.

In a will situation, there is generally no conversation of “someday it will be yours, trust me”. I have seen situations where, despite the best intentions of the parent, that does not always come to fruition.

If property is left to probate, there is also a risk of a will challenge or a will not being made or made correctly; leaving uncertainty for the farming child. There is also the risk of farm assets being taken into account in paying for nursing home care, if a landowning parent needed it during their lifetime.

After a land transfer, it is not until five years have passed that land is no longer taken into account for nursing home care. There is also the practical reality of the adult child not getting the farm until the parent dies, when they might be ready to hand over to their children – not having the freedom of ownership until they are in their senior years themselves.

In a lifetime transfer, you can do tax planning; however, there is very little scope in a will situation where you take the situation and tax system that applies at the date of death. For all these reasons a lifetime transfer should be given careful consideration.

That said, where assets are being transferred during one’s lifetime, generally there are three taxes to be considered – namely, capital gains tax (CGT), capital acquisitions tax (CAT) and stamp duty. Where assets are being left under a Will, only one tax needs be considered: CAT.

1 Capital Gains Tax (CGT)

Most transfers are relieved of any CGT by applying for retirement relief. The parent does not have to retire in the ordinary sense of the word; they can claim the relief and continue farming if they so wish. To qualify for the relief, the parent/owner of the land has to:

(i) be 55 years of age or over.

(ii) own and farm the land for 10 years prior to transfer.

They can lease out for up to 25 years and still claim the relief, provided they owned and farmed for 10 years before the lease. There is no limit on the relief where the parent transfers between 55-65 years of age; thereafter, a limit of €3m applies – but most transfers don’t exceed this.

The family home normally qualifies for principal private residence relief, and there’s no CGT on that, either.

There is no relief on second houses – typically “granny and grandad’s house” – in a farming situation; however, there are other options available to minimise tax.

2 Capital acquisitions tax (CAT)

This is the gift or inheritance tax payable by the child. Each child can be gifted or inherit up to €335,000 from their parents. This is a lifetime limit, so previous gifts will reduce the limit. Thereafter, agricultural relief is normally applied, which reduces the taxable value of the gift of agricultural property by 90%. For example, if the farm was valued at €1m and agricultural relief applies, only €100,000 is taken into account for tax purposes; which can be set off against the €335,000 tax-free limit (so no CAT would apply).

To qualify for agricultural relief, the child has to pass the farmer test – a financial test which requires 80% of their assets to be made up of agricultural property after taking the gift or inheritance.

For example, if the child owned a house jointly with a spouse worth €300,000 and they had a mortgage of €200,000, the value of non-agricultural property taken into account is €50,000; thus the child needs to inherit at least €250,000 worth of agricultural property to pass the farmer test.

The child also needs to pass the active farmer test, which means they need to either farm the land for six years from the date of the gift or inheritance, or lease it to a farmer for six years.

Again, both are relatively easy conditions to satisfy and, again, confining the relief to active farmers or requiring land to be leased to active farmers.

3 Stamp duty

The current rate of stamp duty on agricultural land is 7.5% or 1% on residential property. Young, trained farmers can avail of 0% stamp duty; provided the farm is transferred to them before they are 35 years old. Otherwise they can avail of 1% under consanguinity relief for transfers between blood relatives and again are required to either farm the land for six years or lease to a farmer for six years.

Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, Agricultural Solicitors does not accept responsibility for errors or omissions howsoever arising.