Example: “I am an elderly landowner with a farm that my wife and I have been farming for years. While my children do help out occasionally on the farm, none of them are interested in farming the land although they have said that they would not like to see the farm being sold. I have left the farm to them equally under my will. However, I would like to sell an outside farm to provide for myself and my wife in our later years. What are the tax implications if I sell the outside farm? Will my children be caught for tax on the remainder of the farm when it passes to them? What should I do with the home farm until it is left to my children under my will?”
1 Sale of the outside farm –
capital gains tax
The main tax that concerns you in the sale of the outside farm is capital gains tax (CGT). The amount subject to tax will be 33% of the difference in the value of the land from the date that you acquired it (eg inherited it from your parents) to the date that you sell it. However, an important relief called retirement relief can be claimed which can reduce the CGT bill to nil. The farmer does not have to retire in the popular sense of the word, in order to qualify for the relief; he/she can continue to farm on their remaining land.
Conditions to satisfy in order to avail of retirement relief
In order to claim retirement relief, the person disposing of the farm must be (1) 55 years of age or over and (2) have owned and farmed the land for 10 years prior to transfer.
However, the person selling the land can lease the land to another party for up to 25 years prior to disposal and still be entitled to claim CGT retirement relief. Each letting of land has to be for a minimum of a five-year period, although each letting does not have to be to the same person. Consequently, you should ensure that the land is leased for a minimum period of five years from 1 January 2017, in order to continue to be eligible for the relief.
Provided the value of the farm being sold does not exceed €750,000 (or €500,000 where the person transferring the farm is 66 years or over), no CGT will be payable on the transfer. Where the sales proceeds exceed €750,000 (or €500,000 for those landowners aged 66 years or over) partial relief is available.
If the land is in joint names of you and your wife, each of you are entitled to claim the relief in your own right, ie up to €1.5m (€750,000 each).
2 Land transferred under a will – capital acquisitions tax
The main tax that concerns your children with regard to the inheritance of the remainder of the farm is capital acquisitions tax (CAT). The amount subject to tax will be 33% of the market value of the land on the date of your death. However, each of your children can be gifted up to €310,000 worth of assets tax-free from their parents during their lifetime. Put simply, as you have four children this means that they can inherit a farm with a value up to €1,240,000 tax free.
Conditions to satisfy in order to avail of agricultural relief
However, if the value exceeds €1,240,000, those who qualify for agricultural relief may not have to pay tax on the balance. If a child qualifies for agricultural relief, each of them can be gifted the equivalent of €3.1m worth of agricultural assets tax-free from their parents during their lifetime. In order to claim agricultural relief, 80% of the child’s assets after receiving the gift/inheritance must be made up of agricultural property. So the children need to put a value on all the assets that they own, farming or otherwise.
For example, if one of your children owned a home worth €200,000 (their principal private residence) but they had a mortgage of €100,000 on that house, the value of their non-agricultural assets would be €100,000. Therefore, the value of the land they would be inheriting would have to be at least €400,000 in order for them to pass the 80% farmer test. If they qualify for agricultural relief, the taxable value of the land would be reduced by 90%, ie €40,000 as opposed to €400,000, but as they can be gifted up to €310,000 worth of gifts/inheritances tax-free, they would have no tax to pay.
For transfers from 1 January 2015, a further condition must be satisfied in order to qualify for the relief. The person receiving the gift/inheritance, ie your child, must spend not less than 50% of their time farming the land for a period of six years from the date of the inheritance, or undertake to lease it out to an active farmer for at least six years.
As you have mentioned that none of your children are interested in farming it themselves, it is likely that they would be leasing it out in any event so that the changes would not cause any great difficulty for them.
If the child/children do not pass the 80% farmer test, all is not lost as they may be entitled to claim business relief, which operates in a similar way to agricultural relief whereby the taxable value of the gift/inheritance is reduced by 90%. In order to claim business relief, they must be gifted/inherit the business as well as the underlying asset. Consequently it may be necessary for you to continue the farm as a going concern up to the date of the gift/inheritance to ensure that they continue to be entitled to be eligible for the relief. This could rule out the possibility of you leasing the land as you would cease trading as a farmer.
The level of interest in long-term leasing has increased significantly given the enhanced tax incentives introduced in budget 2015. As set out earlier, leasing the land should not affect the generous tax reliefs available in succession planning (except in claiming business relief from CAT). Consequently, it would be worth considering leasing the home farm to provide for you and your wife in your later years.
Extent of relief
For leases entered into on/after 1 January 2015, the amount of income that maybe exempted under a qualifying long-term lease are as follows:
€40,000 per annum where the qualifying lease is for 15 years or more.€30,000 per annum where the qualifying lease is for 10 to 15 years.€22,500 per annum where the qualifying lease is for seven to 10 years.€18,000 per annum 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
Where a farmer leases both his land and the Basic Payment Scheme (BPS) entitlements, the entire amount received will qualify for the income tax relief subject to the overall limits. It is common for a farmer to pay back a landowner the value of his/her BPS payment as part of the rent and this payment will qualify for the income tax 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.
4 Contract-rearing replacement stock
If you are not ready yet to lease out the land, you could consider contract-rearing replacement stock for another farmer.
Benefits of contract-rearing
Contract-rearers should qualify for the Basic Payment Scheme, assuming they have entitlements and sufficient eligible land to activate those entitlements and comply with the other terms and conditions of the scheme.
A contract-rearer should also continue to qualify for the ANC payment (formerly the Disadvantaged Area Payment). Where stock subject to a contract-rearing arrangement are moved to a contract rearer’s herd number using movement form NBAS 31B (Feedlot/B&B type movement form where ownership of the animals does not change), then account will be taken of such stock in the calculation of the stocking density of the holding of the contract-rearer. In order to claim the payment, the contract-rearer must provide the department with a copy of the signed contract-rearing agreement.
Other benefits of contract-rearing include:
It can provide landowners with a means of using their land and buildings without investing in stock.The contract-rearer can retain his/her herd number and can continue to be regarded as a farmer by the Department of Agriculture.The contract-rearer can continue to be regarded as a farmer for tax purposes.Cashflow can be improved as generally the contract rearer is paid by direct debit on a monthly basis.The return from contract-rearing may be greater than the contract-rearer’s existing farming enterprise.It can reduce a farmer’s workload – it is possible to run a contract-rearing enterprise on a part-time basis.Drawbacks of contract-rearing
The main drawbacks of contract-rearing are the risk of disease outbreak and the risk of conflict between the owner and the contract-rearer. These risks can be minimised by implementing strict biosecurity measures to reduce disease risk and negotiating a written agreement to reduce the risk of conflict.
In the majority of cases, the legal agreement serves to prompt the parties as to the issues to be agreed in advance, eg what is to happen if a heifer dies, what is to happen if either herd is locked up due to TB, what if the target weights are not met, etc. By agreeing solutions to these possible issues in advance, it prevents conflict as to how the issues should be dealt with if and when they arise.
Contract-rearing targets
and payment
Teagasc has prepared guidelines for the contract-rearing of replacement heifers, a copy of which is available on the Teagasc website. The Teagasc guidelines recommend heifer liveweight targets, details of the standard costings of replacement heifer rearing and guidance on minimising the risk of disease. The guidelines show the recommended target weights for different breeds depending on the system of farming, such as Holstein Friesian, British and New Zealand Friesian and crossbred Jersey X Holstein Friesian heifers at different stages during the rearing period.
The costs associated with replacement heifer rearing included in the guidelines are based on data from the 2012 Profit Monitor database. They include a land opportunity cost of €450/ha for the full year and a charge of €149/LU for the farmer’s own labour for rearing the heifer from birth to calving at 24 months of age. Using average rearing costs for a farmer rearing February-born heifers from 12 weeks of age until their return to the dairy farmer’s own herd at 22 months of age, just before the start of the second winter, Teagasc has calculated the average rearing cost amounts to €750/head (€1.30 daily charge).
However, they highlight that the cost of rearing replacements will vary considerably with the efficiency level, with a “low-cost” rearer spending €618/heifer and a “high-cost” rearer spending €887/heifer. Accordingly, it is essential to prepare budgets and to agree on who is responsible for what costs at the outset to ensure that contract-rearing makes sense financially for both the stock owner and the contract-rearer.
There is a heifer-rearing cost calculator to assist in the preparation of these budgets on the Teagasc website.
Contract-rearing agreements
There are two specimen contract heifer rearing contracts available from Teagasc as follows:
1. Weight bonus contract – payments are made by the stock owner to the contract-rearer based on agreed fixed charges per day for each replacement heifer kept plus an additional payment based on achieving agreed target weights.
2. Flat rate contract – based on agreed fixed charges per day for each replacement heifer kept.
The choice of contract depends on the farmers’ and contract-rearers’ preference, normally dictated by how much control the farmer wants to retain over the rearing of their heifers.
5 Registered farm partnership
There is also the option to continue farming but scaling back by forming a registered farm partnership with a local farmer. In order to form a registered partnership, there must be at least two people, one person from category (i) below and one or more persons from categories (i) or (ii):
i. a person who has been engaged in the trade of farming on farmland owned or leased by that person, consisting of at least 3ha of useable farm land, for at least two years immediately preceding the date of formation of the partnership, and
ii. A natural person with an appropriate agriculture qualification whose contribution to the farm partnership entitles him/her to at least 20% of the profit sharing arrangement; and who works in the farm partnership for at least 10 hours per week.
Rules for registered farm
partnerships
Other persons aside from those described in categories (i) and (ii) above, for example family members, may also be registered as participants in the partnership but will not have access in their own right, to EU and State support scheme benefits.
The rules provide that a person may not be involved, either as a category (i) or (ii) partner in more than one registered farm partnership at any one time.
The partnership agreement must cover a minimum term of five years. Furthermore, the partners are obliged to submit all their agricultural holdings and farm assets in to the farm partnership subject to limited exceptions such as lands leased out to another user. The department will assign a unique farm partnership reference number to each registered farm partnership which will be used for applications to department schemes such as BPS, GLAS, etc.
However, the DVO will continue to assign one or more herd numbers to the participants in the partnership. The application to have the partnership registered should be submitted to the Department of Agriculture by 31 March of the year in which it is intended that the partnership is to commence.
Other benefits of registered
farm partnerships
a. Access to 100% stock relief on income tax for young trained farmers for four years.
b. Enhanced 50% stock relief for other partners rather than the standard 25%.
c. Maximising low rate of tax through the sharing of profits.
2) Young Farmer Scheme and National Reserve Scheme.
a. 25% top up of national average Basic Payment Scheme payment.
b. Access to new entitlements or top up on existing entitlements from the National Reserve.
3) Targeted Agricultural Modernisation Scheme grant.
a. Doubling of investment ceiling (€80,000 vs €160,000).
4) Green Low-Carbon Agri-Environmental Scheme (GLAS)/Areas of Natural Constraints Payment (ANC).
a. Two applications where partners have been previously separate farmers.
5) Collaborative farming grant.
a. 50% grant for the vouched (VAT exclusive) cost for each of the legal, advisory and financial services secured in the drawing up of the farm partnership agreement, up to a maximum payment of €2,500.
You should ensure that you and any adjoining landowner are going into a partnership for the right reasons and not for tax considerations alone. If you plan on being a silent partner, then a lease rather than a partnership would be more appropriate. There are various onerous obligations and responsibilities for each of the partners during the currency of the partnership as set out in the partnership agreement and on-farm agreement, not least that the partnership has unlimited liability so that all partners should have an active role to play in the running and management of the partnership.
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. E-mail ameehan@farmersjournal.ie
Example: “I am an elderly landowner with a farm that my wife and I have been farming for years. While my children do help out occasionally on the farm, none of them are interested in farming the land although they have said that they would not like to see the farm being sold. I have left the farm to them equally under my will. However, I would like to sell an outside farm to provide for myself and my wife in our later years. What are the tax implications if I sell the outside farm? Will my children be caught for tax on the remainder of the farm when it passes to them? What should I do with the home farm until it is left to my children under my will?”
1 Sale of the outside farm –
capital gains tax
The main tax that concerns you in the sale of the outside farm is capital gains tax (CGT). The amount subject to tax will be 33% of the difference in the value of the land from the date that you acquired it (eg inherited it from your parents) to the date that you sell it. However, an important relief called retirement relief can be claimed which can reduce the CGT bill to nil. The farmer does not have to retire in the popular sense of the word, in order to qualify for the relief; he/she can continue to farm on their remaining land.
Conditions to satisfy in order to avail of retirement relief
In order to claim retirement relief, the person disposing of the farm must be (1) 55 years of age or over and (2) have owned and farmed the land for 10 years prior to transfer.
However, the person selling the land can lease the land to another party for up to 25 years prior to disposal and still be entitled to claim CGT retirement relief. Each letting of land has to be for a minimum of a five-year period, although each letting does not have to be to the same person. Consequently, you should ensure that the land is leased for a minimum period of five years from 1 January 2017, in order to continue to be eligible for the relief.
Provided the value of the farm being sold does not exceed €750,000 (or €500,000 where the person transferring the farm is 66 years or over), no CGT will be payable on the transfer. Where the sales proceeds exceed €750,000 (or €500,000 for those landowners aged 66 years or over) partial relief is available.
If the land is in joint names of you and your wife, each of you are entitled to claim the relief in your own right, ie up to €1.5m (€750,000 each).
2 Land transferred under a will – capital acquisitions tax
The main tax that concerns your children with regard to the inheritance of the remainder of the farm is capital acquisitions tax (CAT). The amount subject to tax will be 33% of the market value of the land on the date of your death. However, each of your children can be gifted up to €310,000 worth of assets tax-free from their parents during their lifetime. Put simply, as you have four children this means that they can inherit a farm with a value up to €1,240,000 tax free.
Conditions to satisfy in order to avail of agricultural relief
However, if the value exceeds €1,240,000, those who qualify for agricultural relief may not have to pay tax on the balance. If a child qualifies for agricultural relief, each of them can be gifted the equivalent of €3.1m worth of agricultural assets tax-free from their parents during their lifetime. In order to claim agricultural relief, 80% of the child’s assets after receiving the gift/inheritance must be made up of agricultural property. So the children need to put a value on all the assets that they own, farming or otherwise.
For example, if one of your children owned a home worth €200,000 (their principal private residence) but they had a mortgage of €100,000 on that house, the value of their non-agricultural assets would be €100,000. Therefore, the value of the land they would be inheriting would have to be at least €400,000 in order for them to pass the 80% farmer test. If they qualify for agricultural relief, the taxable value of the land would be reduced by 90%, ie €40,000 as opposed to €400,000, but as they can be gifted up to €310,000 worth of gifts/inheritances tax-free, they would have no tax to pay.
For transfers from 1 January 2015, a further condition must be satisfied in order to qualify for the relief. The person receiving the gift/inheritance, ie your child, must spend not less than 50% of their time farming the land for a period of six years from the date of the inheritance, or undertake to lease it out to an active farmer for at least six years.
As you have mentioned that none of your children are interested in farming it themselves, it is likely that they would be leasing it out in any event so that the changes would not cause any great difficulty for them.
If the child/children do not pass the 80% farmer test, all is not lost as they may be entitled to claim business relief, which operates in a similar way to agricultural relief whereby the taxable value of the gift/inheritance is reduced by 90%. In order to claim business relief, they must be gifted/inherit the business as well as the underlying asset. Consequently it may be necessary for you to continue the farm as a going concern up to the date of the gift/inheritance to ensure that they continue to be entitled to be eligible for the relief. This could rule out the possibility of you leasing the land as you would cease trading as a farmer.
The level of interest in long-term leasing has increased significantly given the enhanced tax incentives introduced in budget 2015. As set out earlier, leasing the land should not affect the generous tax reliefs available in succession planning (except in claiming business relief from CAT). Consequently, it would be worth considering leasing the home farm to provide for you and your wife in your later years.
Extent of relief
For leases entered into on/after 1 January 2015, the amount of income that maybe exempted under a qualifying long-term lease are as follows:
€40,000 per annum where the qualifying lease is for 15 years or more.€30,000 per annum where the qualifying lease is for 10 to 15 years.€22,500 per annum where the qualifying lease is for seven to 10 years.€18,000 per annum 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
Where a farmer leases both his land and the Basic Payment Scheme (BPS) entitlements, the entire amount received will qualify for the income tax relief subject to the overall limits. It is common for a farmer to pay back a landowner the value of his/her BPS payment as part of the rent and this payment will qualify for the income tax 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.
4 Contract-rearing replacement stock
If you are not ready yet to lease out the land, you could consider contract-rearing replacement stock for another farmer.
Benefits of contract-rearing
Contract-rearers should qualify for the Basic Payment Scheme, assuming they have entitlements and sufficient eligible land to activate those entitlements and comply with the other terms and conditions of the scheme.
A contract-rearer should also continue to qualify for the ANC payment (formerly the Disadvantaged Area Payment). Where stock subject to a contract-rearing arrangement are moved to a contract rearer’s herd number using movement form NBAS 31B (Feedlot/B&B type movement form where ownership of the animals does not change), then account will be taken of such stock in the calculation of the stocking density of the holding of the contract-rearer. In order to claim the payment, the contract-rearer must provide the department with a copy of the signed contract-rearing agreement.
Other benefits of contract-rearing include:
It can provide landowners with a means of using their land and buildings without investing in stock.The contract-rearer can retain his/her herd number and can continue to be regarded as a farmer by the Department of Agriculture.The contract-rearer can continue to be regarded as a farmer for tax purposes.Cashflow can be improved as generally the contract rearer is paid by direct debit on a monthly basis.The return from contract-rearing may be greater than the contract-rearer’s existing farming enterprise.It can reduce a farmer’s workload – it is possible to run a contract-rearing enterprise on a part-time basis.Drawbacks of contract-rearing
The main drawbacks of contract-rearing are the risk of disease outbreak and the risk of conflict between the owner and the contract-rearer. These risks can be minimised by implementing strict biosecurity measures to reduce disease risk and negotiating a written agreement to reduce the risk of conflict.
In the majority of cases, the legal agreement serves to prompt the parties as to the issues to be agreed in advance, eg what is to happen if a heifer dies, what is to happen if either herd is locked up due to TB, what if the target weights are not met, etc. By agreeing solutions to these possible issues in advance, it prevents conflict as to how the issues should be dealt with if and when they arise.
Contract-rearing targets
and payment
Teagasc has prepared guidelines for the contract-rearing of replacement heifers, a copy of which is available on the Teagasc website. The Teagasc guidelines recommend heifer liveweight targets, details of the standard costings of replacement heifer rearing and guidance on minimising the risk of disease. The guidelines show the recommended target weights for different breeds depending on the system of farming, such as Holstein Friesian, British and New Zealand Friesian and crossbred Jersey X Holstein Friesian heifers at different stages during the rearing period.
The costs associated with replacement heifer rearing included in the guidelines are based on data from the 2012 Profit Monitor database. They include a land opportunity cost of €450/ha for the full year and a charge of €149/LU for the farmer’s own labour for rearing the heifer from birth to calving at 24 months of age. Using average rearing costs for a farmer rearing February-born heifers from 12 weeks of age until their return to the dairy farmer’s own herd at 22 months of age, just before the start of the second winter, Teagasc has calculated the average rearing cost amounts to €750/head (€1.30 daily charge).
However, they highlight that the cost of rearing replacements will vary considerably with the efficiency level, with a “low-cost” rearer spending €618/heifer and a “high-cost” rearer spending €887/heifer. Accordingly, it is essential to prepare budgets and to agree on who is responsible for what costs at the outset to ensure that contract-rearing makes sense financially for both the stock owner and the contract-rearer.
There is a heifer-rearing cost calculator to assist in the preparation of these budgets on the Teagasc website.
Contract-rearing agreements
There are two specimen contract heifer rearing contracts available from Teagasc as follows:
1. Weight bonus contract – payments are made by the stock owner to the contract-rearer based on agreed fixed charges per day for each replacement heifer kept plus an additional payment based on achieving agreed target weights.
2. Flat rate contract – based on agreed fixed charges per day for each replacement heifer kept.
The choice of contract depends on the farmers’ and contract-rearers’ preference, normally dictated by how much control the farmer wants to retain over the rearing of their heifers.
5 Registered farm partnership
There is also the option to continue farming but scaling back by forming a registered farm partnership with a local farmer. In order to form a registered partnership, there must be at least two people, one person from category (i) below and one or more persons from categories (i) or (ii):
i. a person who has been engaged in the trade of farming on farmland owned or leased by that person, consisting of at least 3ha of useable farm land, for at least two years immediately preceding the date of formation of the partnership, and
ii. A natural person with an appropriate agriculture qualification whose contribution to the farm partnership entitles him/her to at least 20% of the profit sharing arrangement; and who works in the farm partnership for at least 10 hours per week.
Rules for registered farm
partnerships
Other persons aside from those described in categories (i) and (ii) above, for example family members, may also be registered as participants in the partnership but will not have access in their own right, to EU and State support scheme benefits.
The rules provide that a person may not be involved, either as a category (i) or (ii) partner in more than one registered farm partnership at any one time.
The partnership agreement must cover a minimum term of five years. Furthermore, the partners are obliged to submit all their agricultural holdings and farm assets in to the farm partnership subject to limited exceptions such as lands leased out to another user. The department will assign a unique farm partnership reference number to each registered farm partnership which will be used for applications to department schemes such as BPS, GLAS, etc.
However, the DVO will continue to assign one or more herd numbers to the participants in the partnership. The application to have the partnership registered should be submitted to the Department of Agriculture by 31 March of the year in which it is intended that the partnership is to commence.
Other benefits of registered
farm partnerships
a. Access to 100% stock relief on income tax for young trained farmers for four years.
b. Enhanced 50% stock relief for other partners rather than the standard 25%.
c. Maximising low rate of tax through the sharing of profits.
2) Young Farmer Scheme and National Reserve Scheme.
a. 25% top up of national average Basic Payment Scheme payment.
b. Access to new entitlements or top up on existing entitlements from the National Reserve.
3) Targeted Agricultural Modernisation Scheme grant.
a. Doubling of investment ceiling (€80,000 vs €160,000).
4) Green Low-Carbon Agri-Environmental Scheme (GLAS)/Areas of Natural Constraints Payment (ANC).
a. Two applications where partners have been previously separate farmers.
5) Collaborative farming grant.
a. 50% grant for the vouched (VAT exclusive) cost for each of the legal, advisory and financial services secured in the drawing up of the farm partnership agreement, up to a maximum payment of €2,500.
You should ensure that you and any adjoining landowner are going into a partnership for the right reasons and not for tax considerations alone. If you plan on being a silent partner, then a lease rather than a partnership would be more appropriate. There are various onerous obligations and responsibilities for each of the partners during the currency of the partnership as set out in the partnership agreement and on-farm agreement, not least that the partnership has unlimited liability so that all partners should have an active role to play in the running and management of the partnership.
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. E-mail ameehan@farmersjournal.ie
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