Budget changes to impact on future “part-time” and “hobby” farmers

By and large the recent budget brought welcome news for the farming and agri-food sector however, some changes which are due to be introduced on 1 January 2015 will introduce a number of new hurdles for part-time farmers to overcome in order to qualify for a very important existing relief from Gift/Inheritance Tax on receiving the family farm.

As a result of the proposed changes, from 1 January 2015, if a part-time farmer fails to qualify for the relief they could face a Gift/Inheritance Tax bill which would be up to ten times higher than it would be under the existing rules. Given the proposed changes, any landowners who are considering a transfer of their farm to someone who is likely to be a part-time farmer or indeed a hobby farmer (i.e. non-commercial farmer) might want to consider whether action should be taken now to avoid being subjected to the new more stringent conditions which are due to come into force after 31 December of this year.

Gift and Inheritances Tax is known as Capital Acquisitions Tax or CAT for short. The tax is charged at a rate of 33% of the market value of the assets received. However, in the case of children, they are entitled to receive up to €225,000 from a parent in their lifetime CAT free and anything received above that threshold is generally subjected to tax at 33%. However, where certain conditions are met, Agricultural Relief provides relief from CAT to the recipient of gifts or inheritances of agricultural land by reducing the value of the gift or inheritance by 90% for CAT purposes.

From 1 January 2015 onwards, in addition to the existing conditions, it is proposed that Agricultural Relief will only be available to:

1. an “active farmer” or,
2. a person who onward leases the farm to an “active farmer” after receiving it or,
3. a person who pursues a prescribed agricultural qualification within 4 years of receiving the land and also farms the land on a commercial basis.

An “active farmer” is set to be defined as someone who spends more than 50% of their normal working time farming on a commercial basis. Given this proposed new condition, farmers who farm on a commercial basis but who have another job off-farm, may not qualify for the relief from 1 January 2015 onwards unless they also pursue a prescribed agricultural qualification within 4 years of receiving the farm. Furthermore, those farmers who do not farm on a commercial basis (i.e. “hobby” farmers) would not qualify for relief under the proposed new rules, whereas they potentially can qualify under the existing rules which remain in force to 31 December of this year.

Given the above, the proposed changes are likely to impact on two broad categories of people, the first being those who do not intend to farm the land after they receive it and second being those who do intend to farm the land part-time on a commercial basis but who do not have certain agricultural qualifications. From 1 January, the first category of person would have to lease the farm to an “active farmer” for a set number of years in order to qualify for the relief whilst the second category of person must complete a prescribed agricultural course within 4 years of receiving the farm to be in a position to qualify for the relief. Those who neither let the farm to an “active farmer” or who do not farm the land on a commercial basis will not be entitled to the relief from 1 January.

Landowners should make themselves aware of the new additional conditions for the relief and consider whether or not the changes are likely to have any impact on their succession plans.

One of the main policy objectives of tightening the conditions for Agricultural Relief is to seek to ensure that as much agricultural land as possible is put to productive use by full-time farmers on a commercial basis. A lot of the other agri-sector changes proposed in the budget seek to achieve the same policy aim and to encourage the transfer of farms to younger, more active farmers. For instance reduced rates of Stamp Duty are payable for a limited time on certain transfers of land to certain relatives who are full-time farmers. There are increased incentives to let land under longer term leases of five years or more to active farmers, with the income receivable under such leases being exempt up to €40,000 per annum in the case of leases for a duration of 15 years or more. Amongst the other proposed measures is a relief from CGT for farmers who sell their existing farm but invest the full sales proceeds in a new farm. Also, certain farmers who may not have qualified for CGT retirement relief due to letting their farms for a number of years on a conacre basis may now also have a window of opportunity to qualify for the relief if they enter into leases of 5 years or more.

Planning for succession is not something many relish the thought of; however it makes sense for a host of reasons to have that conversation with your family.