Most people considering a transfer of the family farm will know the term ‘Agricultural Relief’ — and the importance of qualifying for it.
What many people do not know is how to qualify and how to remain qualified for the required six-year period.
The benefit of the relief is to reduce the taxable value of farm assets being transferred by 90pc — minimising or eliminating any liability to Capital Acquisition Tax (gift/inheritance tax) on the part of a recipient of agricultural property.
Eligibility is initially based around the ‘80pc asset test’. Having scaled that hurdle, it is about who farms the land thereafter for a six-year period, described as the ‘active farmer test’.
The 80pc asset test
This test requires that 80pc of the transferee’s gross worth on the day they receive the gift or inheritance comprises agricultural property.
The only deduction allowed from the value of non-agricultural property is a mortgage on a principal residence.
Because of the age profile of transferee nowadays, typically 30-40 years, I am I am encountering more and more cases where this test poses a problem.
Where the transferee is married, the problem can usually be solved by transferring assets over to their spouse with no tax implications, but for unmarried people, finding a solution can be more problematic.
‘Agricultural property’ includes agricultural land, farm dwellings, woodlands (but not harvested timber), farm buildings, farm machinery, livestock, bloodstock and payment entitlements.
The active farmer test
Many people are under the impression that all transferees need a Green Cert or equivalent but that is not the case. There are three ways to meet the active farmer test:
■ Be an ‘active’ farmer — ie, farm the land on a full-time basis. Revenue describes ‘a full-time basis’ as being a person who on average over the year works 50pc of their normal working hours on the farm, subject to a maximum of 20 hours.
So a person working a 36-hour week will be required to satisfy Revenue that will be in a position to work 18 hours per week on average over the year on the farm.
In this instance they do not need a Green Cert or equivalent.
■ Be a ‘qualified farmer’ — ie, possess the necessary farm qualification, such as a Green Cert, and farm the land on a full-time or part time basis. Farming can be done through a company where the transferee holds a majority shareholding.
■ Lease the land for a period of at least six years to an active farmer or to a qualified farmer. A Green Cert or equivalent is nor required in this instance by the transferee.
Where the beneficiary decides to farm the agricultural property and then decides to lease it within the six-year period, relief will not be withdrawn, provided the lease/lessee satisfies the requirements for the relief for the remainder of the six-year period.
Similarly, if a beneficiary initially leases the agricultural property and decides, within the six-year period, to end the lease (provided the lessee agrees) and to personally farm it, relief will not be withdrawn.
A building or a dwelling, without the land, is not agricultural property. If the land is gifted to the transferee and the transferor retains the house, the house will not be ‘agricultural property’ and will not qualify for relief on its own assuming it is later gifted to or inherited by the same beneficiary.
However, once the transferee becomes the owner of both the land and dwelling, the entire qualifies for agricultural relief in the calculation of eligibility for any future gifts or inheritances of agricultural property.
Where the ‘active farmer’ condition is met by leasing out the farm to a full-time or qualified farmer and where the dwelling accounts for more than 25pc of the value of the entire, the dwelling will not qualify for agricultural relief unless the transferee is going to use it as his principal private residence.
John has inherited 90ac and a farm dwelling from his late father. The land is valued at €1.2m and the dwelling at €330,000. John intends to lease out the farm to a full-time farmer.
Because the dwelling accounts for more than 25pc of the value of the entire holding, John will not qualify for agricultural relief on the dwelling because he will be renting it out.
However, because the dwelling qualifies as a farm dwelling on the valuation date, it does not impact on the ‘80pc asset test’ so the land does qualify for relief.
John’s taxable inheritance will be €330,000 plus 10pc of €1.2m, ie, €120,000. This amounts to a taxable inheritance of €450,000, giving rise to a liability to CAT of €37,950.
If the house had accounted for less than 25pc of the combined value, John would have had no tax liability.
Disposals and reinvestment
Where part of or all of the agricultural assets inherited are disposed of within a six-year period there may be a clawback of agricultural relief.
However, where the sale proceeds are reinvested in replacement land or on the construction of new agricultural buildings on the land or on other land owned by the beneficiary, there will be no clawback.
It is not necessary that reinvestment is made in the same type of agricultural property. For example, the proceeds from the sale of livestock could be reinvested in land or machinery without losing the relief.
An important point to note is that land acquired from a spouse does not qualify as the replacement of property.
Gifting on within the six years
A gift of the agricultural property, where no money changes hands, is not treated as a disposal, so agricultural relief is not clawed back.
This could arise where an older farmer inherited land and decided within a short period of time to gift it on to his/her son or daughter. In such cases the son or daughter will need to satisfy the conditions of the relief.
Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is a farm business and tax consultant based in Carrick-on-Suir; www.som.ie