Capital Acquisitions Tax – Agricultural Relief

The 2015 Budget, introduced in October 2014, proposed a number of changes in relation to Agricultural Relief contained in Capital Acquisitions Tax legislation. Following the enactment of the subsequent Finance Act, The Revenue Commissioners have issued a short guide which outlines how the new provisions will be implemented in practice. Here is an overview.

The relief in brief

To recap on the main provisions, Agricultural Relief as set out in Section 89 Capital Acquisitions Tax Consolidation Act 2003 provides for a 90% reduction in the effective 33% tax rate applying to gifts or inheritances of agricultural property. The main condition is that at the valuation date (the date the beneficiary becomes beneficially entitled to possession of the asset) the agricultural assets comprise at least 80% of that beneficiary’s total property.

Additional conditions applicable from 1 January 2015

First and foremost, it should be stressed that mandatory disclosure will not apply to legitimate use of tax incentives or reliefs which are routinely considered by accountants and tax advisors on a day-to-day basis. It applies instead to any transaction, or proposal for any transaction that meets all of the following tests.

(i) The farmer who passes the 80% value test set out above must actually farm the agricultural property for a period of at least 6 years, OR,

(ii) The farmer inheriting the land must lease the agricultural property for a period of not less than 6 years commencing on the valuation date. The agricultural property may be leased to a number of lessees as long as each lease and lessee satisfies the conditions of the relief. The lease may be entered into by the owner with another individual, a partnership or to a limited company whose main shareholder and working director farms the agricultural property on behalf of the company.

(iii) The farmer (or where appropriate the lessee who farms the land under the lease) must have a recognised agricultural qualification OR instead farm the agricultural property for not less than 50% of his or her normal working time.

(iv) The agricultural property must be farmed on a commercial basis with a view to realisation of profits, which in either case means that the relief is only available to genuine farmers. However it is not the case that relief will be lost just because a loss arises in one particular year. Furthermore, in determining whether a profit or loss arises, the single farm payment will continue to be taken into account.

(v) It should be noted that there is provision for a farmer who farms the land initially after the valuation date and then leases it within the initial 6 year period OR conversely leases it first and then farms it himself to retain the relief. The KEY point is that it continues to be farmed by a “genuine” farmer on a commercial basis.

Normal working time

There is useful clarification provided by Revenue as to what constitutes “normal working time”. A standard working week is taken as being 40 hours. This means that Agricultural Relief will be maintained in circumstances where the land is farmed for a minimum of 20 hours per week (averaged over the year as a whole), either by the farmer as owner of the land, or as outlined above by a qualifying lessee.

This is important as it allows farmers working on their own land to engage in off farm employment. Indeed, there is quite a bit of flexibility included in the guidance, if a farmer can show that their own working week is less than 40 hours per week in total, then the 50% test applies to actual hours worked instead of a higher standard 40 hour threshold.

It is also accepted, for example in the case of occupation of woodlands on a commercial basis, that this can be carried on commercially even where the 20 hours/50% test is not met. It is really open to taxpayers claiming the relief to argue the case on its own merits, but in most circumstances it would be expected that the facts as presented will make it clear one way or the other as to the commerciality of the land use or not.

Withdrawal of relief

If the conditions set out above cease to apply within 6 years of the valuation date then the relief is withdrawn, although there is provision for the proceeds of any land sale to be reinvested in similar qualifying land.