Tax considerations when buying and selling land
In 2017, the latest year for which figures are available, 32,990 acres of agricultural land were sold in Ireland for a total value of €161.1 million. In this article, Claire Walsh outlines some of the key points farmers should consider when buying and selling agricultural land.
When planning to purchase agricultural land, it is important to seek appropriate professional advice and take all related costs into account. These will include stamp duty, transaction fees and VAT. If you are borrowing to fund your purchase, only the interest on your loan is allowed as a tax deduction. Questions to discuss with your accountant include whether it is better to buy the land in your own name or to purchase it using a company structure.
When buying non-residential property, including agricultural property, stamp duty must be paid, however, this cost can be reduced if you qualify for certain stamp duty reliefs.
Consanguinity relief: This is a stamp duty relief that applies to certain land transfers. When the relief applies the rate of stamp duty is 1% instead of the normal 6%. To qualify for the relief, you and the person who transfers the land to you must be a related person.
Farm consolidation relief: This reduces the stamp duty to 1% (instead of the general rate of 6%) on transactions that qualify for a farm restructuring certificate and satisfy certain other conditions. This relief applies to transfers of agricultural land executed on or after 1 January 2018 and on or before 31 December 2020. Farm consolidation relief can be clawed back if the land is disposed of within 5 years of the date relief was claimed.
As well as stamp duty, you will incur legal and Land Registry fees when purchasing land. These will need to be factored into your budget.
VAT on property is a tricky area and one where obtaining professional advice is vital. You will need to establish the VAT history of the property so as to identify and resolve any potential issues that could lead to unexpected costs if not addressed.
Another general point to note is that your ability to recover VAT when acquiring property depends on the extent to which the property will be used for VATable activities.
Capital Gains Tax at 33% is chargeable on the sale of land in Ireland, including farmland, however, farmers selling land may be able to reduce their CGT bill if they qualify for certain reliefs.
You may be able to claim CGT relief if you buy and sell land in order to make your farm more efficient. To qualify for this farm restructuring relief, the first sale or purchase must take place before 31 December 2019 and the second transaction must occur within the next 24 months.
A reduced stamp duty rate (1% rather than the general rate of 6%) applies to farm consolidation where you sell and buy other land in order to consolidate your holding. Once the relevant conditions for consolidation are satisfied, stamp duty will only be payable to the extent that the value of the land that is purchased exceeds the value of the land that is sold. The stamp duty rate is 1%.
If you are aged 55-66 and sell your business or farmland to someone other than your child, you may qualify for retirement relief. This provides full relief from CGT on the sale proceeds if the market value at the time of disposal does not exceed €750,000. If you are over 66, the threshold is reduced to €500,000. The threshold is a lifetime limit. If you exceed the threshold, Revenue will withdraw relief given on earlier disposals. Where the sale value exceeds the Retirement Relief threshold, marginal relief will apply. This limits the CGT to half the difference between the market value and the threshold.
You may also be entitled to retirement relief where you transfer land to your child. For the purpose of this relief, ‘child’ can include a child of your deceased child, a niece or nephew who has worked full time on the farm for at least five years, or a foster child who you have maintained for at least five years. For family transfers such as these, you can claim full relief if you are aged 55--65, however the relief is restricted to €3 million if you are 66 or older.
Beware of transferring land to joint names if either party is aged over 55 as this can affect the CGT threshold that will apply for retirement relief purposes.
If you make made gains when disposing of business assets, you may qualify for entrepreneur relief which reduces the CGT rate to 10 percent instead of the normal rate of 33%. There is a lifetime limit of €1 million on the gains that you can claim relief on for this relief.
When transferring assets to the next generation, capital acquisitions tax is another important consideration. Your child can receive gifts and inheritances of up to €320k from you before having to pay CAT however the balance of any gift or inheritance is then liable for CAT at 33%. Two reliefs that can reduce or eliminate your child’s CAT liability are agricultural relief and business relief.
This relief reduces the taxable value of agricultural property for CAT purposes by 90%. To qualify, your son or daughter must either lease the property to someone who farms it on a commercial basis for at least six years or farm the property themselves on a commercial basis for at least six years. If they choose to farm the land themselves, they will need to have an appropriate agricultural qualification and must farm for at least 50% of their normal working hours. In addition, the value of the agricultural property must make up 80% of their total property value on the valuation date—i.e. the date on which the market value of a gift or inheritance is established. The market value is the best price the property would achieve if sold on the open market.
Agricultural relief can be clawed back if your son or daughter ceases to fulfil the relevant conditions.
If your child does not qualify for agricultural relief, they may be able to claim business relief. This also reduces the taxable value of relevant property by 90%. The business must have operated for profit for a minimum period of time before the gift or inheritance, in addition your child must retain ownership for a minimum period after the date of the gift or inheritance.
As with agricultural relief, business relief can be clawed back if your child ceases to fulfil the relevant conditions.
TThe reliefs outlined in this short article can be lost or clawed back in certain circum- stances and that the consequences of this are potentially costly. As is always the case in tax matters, it is advisable to seek advice well in advance of any sale or purchase. Your accountant will explain the options and how best to structure transactions to minimise your tax liability.