Professional approach will take the potential pain out of land leasing

THIS article is the first in a two-part series in which I will examine the financial and practical aspects of leasing out part of or your entire farm. Part two (in two weeks’ time) will compare the net financial return from leasing with that of a typical dairy farm.

The average farmer in Ireland is 61 years old and unfortunately many of those farmers do not have an obvious successor and the prospect of farming unassisted until the day they die may not be very appealing.

The Government has acknowledged this reality and the land mobility obstacle that it presents by introducing ever more favourable tax incentives for leasing out land.

In much of the country, mainstream farm enterprises with the exception of dairying are not yielding a return that would match, or in most cases even come close to matching the potential rental income from the farm.

This begs the question, why is more land not rented?

The answer to the question is quite complex and may be as much about fear of the unknown and a lack of faith in the legal system.

The fear factor may relate to waking up some morning and having no reason to get out of bed. It may be about the prospect of seeing another farmer farming one’s land and not doing so in a manner that meets with the landowner’s approval.

The risk of the tenant abusing the land or not paying the rent or simply not vacating the land when obliged to do so can also be frightening prospects in the mind of the landowner.

However, I can say that in my 40 years advising farmers I have only encountered problems between landowners and tenants on three occasions and all three were where no formal lease or letting agreement was in place and the parties did not know each other prior to entering into the letting.

To those farmers who are considering renting out their farms I advise seeking the input of an advisor who is well experienced in dealing with landlords and tenants.

Ideally you should know your tenant or at least enquire from a number of sources about his/ her character.

You should draw up a lease that includes any specific requirements that you may wish your tenant to observe and that deals comprehensively with such matters as your Basic Payment Entitlements.

The lease must be stamped with the Revenue Commissioners and Registered with the Property Services Regulatory Authority.

Tax Relief incentive

Arguably, the greatest incentive towards leasing land is the tax incentive. Tax savings of up to €16,000 can be made by an individual landowner in any one year.

Table 1 sets out the relief available for the various lengths of lease for an individual landowner.

A spouse or civil partner is also entitled to the relief so if the land happens to be in joint names or if the spouse/civil partner has land to lease separately, both parties are entitled to the relief.

Where the annual rent exceeds the allowable tax exemption limit, there may be a case for transferring the lands into joint names.

However, professional advice should be sought on how such a move might impact on one’s State pension entitlements. Lease income relief refers to Income Tax only and not PRSI or Universal Social Charge so the rent has to be declared on your annual tax return.

Leases and eligible tenants

To qualify for the tax exemption, a qualifying lease does not have to be a formal legal lease but it must be evidenced in writing.

The document must contain the names and addresses of the lessor(s) and lessee(s), the acreage, address, location etc. of the land which is the subject of the lease, the terms of the lease, the duration of the lease which must be at least five years and is signed by the parties.

A formal lease should be drawn up in all cases, stamped with Revenue and registered with the Property Service Regulatory Authority.

This ensures that both the land owner’s and tenant’s rights are protected if something goes wrong.

Table 2 sets out the various parties that do and don’t qualify as eligible tenants.

Eligible landowners

There are very few conditions for qualifying as an eligible landowner (lessor). The landowner must have title to the land but does not necessarily have had to have farmed it previously. There are no age limits.

Leases and Farm Entitlements

Where Basic Payment Scheme entitlements are leased along with the land, the tax relief also covers that part of the rent that relates to the entitlements.

Farmers who are leasing their entitlements in 2017 should seek the advice of their agricultural advisor/consultant before entering into any agreement, as entitlements have to be transferred to the lessee and it is vital that this is properly done and before the time deadline, which is generally by the BPS filing date.

Leases and Farm Consolidation

Farmers who have out-farms that are some distance from the home farm could consider leasing out such farms and leasing in lands that are adjacent to the home farm where such lands become available.

Apart from assisting farm consolidation, this would have the added benefit of the rent which he/she receives being tax free and the rent he/she pays out as being tax deductible.

Assuming the land leased in is equal or greater in area to the land leased out, there should be no negative implications for the Basic Payment Scheme.

Martin O’Sullivan is the author of the ACA ‘Farmers Handbook’. He is a partner in O’Sullivan Malone and Company, accountants and auditors. www.som.ie. Ph: 051 640397