Last week we looked at the basics of agricultural relief. This week we are going to look at some tips and traps when it comes to agricultural relief. The main ones are
- Meeting the farmer test
- Preparing to meet the test
- Deductions for liabilities
- Better than Business Property Relief
Meeting the farmer test
The basic rule is that 80% of your assets, after the gift or inheritance, is agricultural property. Rory Morris comes to visit you. His dad Tom died three weeks ago, and Rory inherited the farm, the stock, farm buildings, and other assets. The values are as follows.
|Total Agricultural Assets||€1,800,000|
Rory and his wife Collette live in Limerick. Their house is worth €400,000 and they have €100,000 in savings. The question is will Rory meet the farmer test? The total value of assets he inherits from his dad is €1,925,000. Of this amount €1,800,000 is agricultural property. Rory’s total assets after the inheritance come to €2,425,000. So, he doesn’t meet the farmer test as only 74.2% of his assets are agricultural.
You inquire further and ask Rory if he has a mortgage. He has and the amount left on it is €200,000. If we deduct the mortgage the net value of Rory’s assets is €2,225,000. He now meets the farmer test as 80.9% of his assets are agricultural. [€1.8 million divided by €2.225 million]
Revenue accept that you can deduct a mortgage on an off-farm principal private residence. This is on the basis that the mortgage was for the purchase, repair, or improvement of the house.
Prep to meet the test
If you get a gift of agricultural property you will have to do your homework before receiving the gift. Will you meet the farmer test on the date of the gift? It could be that you are borderline to meet the 80% test. Should that be the case then some useful tips are
- Gift cash on the condition that is invested in agricultural property
- Gift cash to a spouse or children of the person who is getting the agricultural property
- Convert cash to agricultural assets before making the gift
You must meet the farmer test on the valuation date. The valuation date for an inheritance is usually the date of grant of probate. This will be months after the date of death. It allows you to organise your affairs to help you to meet the test.
When cash is subject to the condition that it be invested in agricultural property. The beneficiary has two years to invest the cash to meet that condition. If some of the cash is not invested, then that can impact the farmer test.
Passing land by gift will result in a stamp duty cost for the recipient. The cost can reduce if consanguinity relief applies. As stamp duty will be a cost there is a temptation to value the land and farm buildings at a conservative value. This value will be your base cost for any future sale. While a lower value could suit you now, it could lead to higher Capital Gains Tax exposure in the future if you sell.
Deductions and Expenses
Agricultural relief gives a 90% reduction in the market value of agricultural property. For Rory agricultural relief is
|Value of Agricultural Property||€1,800,000|
|Agricultural relief 90%||€1,620,000|
|Less allowable costs||€4,675|
|Net Taxable Value||€175,325|
Let’s assume that Rory has to pay €50,000 for legal, tax consulting, and funeral expenses. The total value of all assets was €1,925,000 of which €1,800,000 were agricultural. So, 93.5% of the costs relate to agricultural property. This comes to €46,750. This proportion of the costs must also reduce by 90% as you can see above. The rest of the costs of €3,250 would be allowable in full as a deduction against the non-agricultural property.
|Less balance of costs||€3,250|
|Net taxable value||€121,750|
Crops and trees growing on agricultural land is agricultural property. But when the crops are trees are cut down, they are no longer agricultural property but cash.
One very interesting point about trees or underwood. The farmer test is not applied to property that comprises trees or underwood. This is a possible planning opportunity.
You will remember to get the relief you must meet the farmer test and farm the land or lease the land to an active farmer. You must meet this rule for 6 years beginning on the valuation date.
If you dispose of the agricultural property within 6 years, there is a clawback of the relief. There is an exception for crops, trees, and underwood. You can avoid the clawback if the proceeds of the disposal are reinvested
- in other agricultural property within a year on the sale of
- within 6 years of a compulsory purchase
If the full proceeds are reinvested there is no clawback. If only part of the proceeds is reinvested, then there is a partial clawback of the relief.
Better than Business Property Relief
The first relief you look at is Agricultural Property relief. If that doesn’t work for you then Business Property Relief is an option. Which is better? On the face of it, Agricultural relief is better as more assets can qualify for relief. For example, a farm dwelling house can qualify for the relief. But it wouldn’t qualify for business property relief. Looking at a farmhouse with a value of €300,000 and assuming all thresholds are used the difference is
|Agricultural relief – 90%||€270,000|
|Tax Payable – 33%||€9,900|
|Business Property Relief||€0|
|Tax Payable – 33%||€99,000|
It is agricultural land that determines if the relief applies or not. A building transferred without land will not qualify for the relief. So, a farmhouse transferred without land does not qualify
The above is an example of some tips and pitfalls of this relief. There are many areas we didn’t cover. Areas like time farming the land, small parcels of land, development land and leasing land are important. Everyone’s circumstances are different. This is a very valuable relief and with proper planning you can get the most out of it.
Did you inherit agricultural property? If you need help, Start here