Transferring the family farm without a tax headache

A lot of small family farms are rented out and the owner is working another job full time. In this case, the owners (my parents) are now in their 60s, one retired the other close to retirement.

I have completed a distance-learning green cert and have 80 per cent of my assets on inheritance in agricultural assets. My plan would be to lease the land for seven years on inheritance. But I heard someone say that the owner has to be farming the land and not leasing it for the capital acquisition tax reduction of 90 per cent to be applied. Is there any truth to that?

There’s stamp duty at 1 per cent which may go up in the next budget given the current economic climate which I also believe is 0 per cent upon death of both parents, God forbid. And finally there is the question of capital gains tax on this land my parents inherited in 2006 on any increase in value. I’m just trying to make sense of it all.

Mr L.M., email

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When it comes to farming, succession can be a very delicate subject not only in who gets to inherit but also in ensuring that the inheritance does not come encumbered with a tax bill that can only be managed by selling off some of the land or other assets.

That's why there is, as you note, special capital acquisitions tax (inheritance or gift) tax relief for farmers. Relief has been available since CAT was first introduced in 1975 and, as the legislation says, its purpose was to "encourage the productive use of agricultural land and to prevent the sale or break-up of farms" just to pay an inheritance tax bill.

The nature of the relief has changed down the years and is now referred to as Part 11 Agricultural Relief.

As you note, the effect of this is to reduce the value of the inheritance by 90 per cent. As a child can inherit assets worth up to €335,000 from parents, this effectively means a child can inherit a family farm worth up to €3.35 million without having to pay any inheritance tax at all.

On anything above that, capital acquisitions tax will apply at 33 per cent but, given the value of the underlying asset, it will be easier to find or raise funds to meet any such tax bill.

Strict conditions

It’s critical relief for keeping farms within family ownership and a very valuable one in cash terms, so it comes as no surprise to realise that there are quite strict conditions applying to it, albeit not very surprising ones.

First, the property must meet the definition of agricultural property when it is gifted or inherited.

Second, for the person receiving the farm, 80 per cent of all their property or assets must also meet the agricultural property definition at the valuation date – normally the date of the probate for an inheritance or the date of transfer, if a gift.

But that can include cash if the cash is earmarked for investment in agricultural property as long as that investment is completed within two years of the cash being received.

Finally, you, as recipient, must be an “active farmer” at that time and you must work the farm for a minimum of six years. There is provision, however, for you to benefit while leasing the land, as long as it is to an active farmer and that the land is being farmed as a commercial venture for the minimum six-year period.

So, no, there is no truth in what you heard about losing out on capital acquisitions tax relief if you lease the land – as long as it is to a person who meets the eligibility criteria.

If you sell the land, or if it ceases to be farmed commercially, within the six-year period, the Revenue Commissioners will pursue a clawback of some of the inheritance relief granted.

The term “agricultural property” is fairly wide and includes actual land, farm buildings and farm houses, machinery and stock, alongside things like milk quotas and single farm payment entitlements.

It can even include land used for solar panels, within certain limits.

Active farmer

The requirement that you must be an active farmer was introduced in the 2014 Finance Act and come into force for anyone receiving such land on January 1st, 2015, or later.

To be deemed an active farmer, you must either have one of a listed group of qualifications, or you must farm the land for a minimum of 20 hours a week – deemed to be half of a working week.

If you lease the land, the person to whom you lease it must meet these criteria.

It is possible to secure the necessary qualification after you inherit the land but it must occur within four years of you receiving the farm.

In relation to your qualification, the acceptable qualifications are set down in Schedule 2 of the Stamp Duties Consolidation Act 1999. This lists a series of qualifications offered by Teagasc, the Farm Apprenticeship Board, third-level colleges/ the National University of Ireland and certificates awarded by the National Council for Educational Awards.

I do not see any mention of the distance learning green cert to which you refer. As you intend leasing the land, that will not matter. If there is any doubt on that point, however, you might check directly with the Revenue in case the list has been updated.

If you inherit the farm, stamp duty and capital gains tax do not come into the equation. However, if the farm is transferred during your parents’ lifetime, both will become factors.

Stamp duty

My understanding is that stamp duty will be levied at 2 per cent unless you qualify as a Young Trained Farmer, in which case you will be under 35, will have one of the listed agricultural qualifications and submit a business plan to Teagasc. I think your qualification could prove an issue there.

On capital gains, the tax bill on a lifetime transfer of a family farm to a child – ie you – could disappear under retirement relief that is in place specifically for this purpose.

If the amount of relief that you can claim depends on your age at the time of disposal. If your parents are 65 or under when they transfer the farm to you, they can claim full relief. If they are older, there is an upper limit on the relief – €3 million.

And, again, if you dispose of the land within six years of receiving it, Revenue will come looking for the capital gains tax that was not paid. And it will be you they come looking to, as well as taxing any capital gain you make on the disposal. However, as you outline it, this is not the plan.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.