As Budget 2013 approaches the speculation around the continued availability of succession planning tax reliefs grows. Section 89 of the Capital Acquisitions Tax Consolidation Act (CATCA) 2003 provides a valuable relief from Capital Acquisitions Tax (“CAT”) on a gift or inheritance of agricultural property. This relief reduces the taxable value of the agricultural property by 90%. The relief is available where certain conditions are satisfied and the key conditions are examined in this article.

What is Agricultural Property?

The gift or inheritance must consist of agricultural property at the date of the gift or inheritance and at the valuation date. Section 89 CATCA 2003 provides a definition of agricultural property as follows:

“agricultural property” means agricultural land, pasture and woodland located in a Member State of the EU and crops, trees and underwood growing on such land and also includes such farm buildings, farm houses and mansion houses (together with the lands occupied with such property) as are of a character appropriate to the property and farm machinery, livestock and blood-stock on such property”

Also included in the definition is the EU Single Farm Payment entitlement. Excluded from the above definition would seem to be market gardens, land covered by water, fish farms and perhaps even certain factory farms catering for intensive production.

The definition of agricultural property contains some interesting points for consideration. With regard to farm machinery, livestock and bloodstock it is important to note the requirement for these assets to be located “on such property”. For example, it can be taken from this that a simple gift of bloodstock without land to go with it may not qualify for relief.

With regard to farm buildings, farm houses and mansion houses, they must be of a character appropriate to the property. The farmhouse is the house from which the farmer carries out their farming activities. The interpretation of this area presents difficulties mainly when the land attaching to the buildings is small in acreage. There have been a number of UK cases that considered this point based on similar legislation to ours. It emerged from a UK case, Lloyds TSB (personal representatives of Antrobus dec'd) v IRC, that the following factors would appear to be relevant with regard to the character test (in the context of a farmhouse):

• Is the house of a character appropriate by reference to its size, content and layout, with the farm buildings and the particular area of land being farmed?
• Is the house proportionate in its size, nature and requirements of the farming activities being conducted on the land?
• Does it pass what is commonly referred to as the elephant test – ‘one knows one when one sees one’?
• Would the educated rural layman consider it a farmhouse or a house with land?
• Is there is a history of agricultural production associated with the house?

Farmer Test

Relief is only available where agricultural property is taken by a “farmer”. A “farmer” is defined as an individual in respect of whom not less than 80% of their gross property in possession consists of agricultural property after taking the gift or inheritance (for this purpose an interest in expectancy and certain interests in discretionary trusts are included). For the purposes of the farmer test no deduction is taken from the market value of property for any debts except for debts in respect of an off-farm house which is the beneficiary's only or main residence.

The following example illustrates how the test is to be calculated.

Example
X holds a house worth €100,000. X inherits from his father land worth €600,000, cattle worth €110,000, stored harvested crops worth €50,000 and cash of €25,000.
	Agricultural property	Non-agricultural property
	€	€
House		100,000
Land	600,000
Cattle	110,000
Harvested crops		50,000
Cash		25,000
	–––––	––––––––
Total	710,000	175,000
Agricultural percentage (710,000/885,000) = 80.02% (farmer test satisfied). In the above example, harvested crops would not qualify as agricultural property as they are no longer growing.

The individual taking the gift or inheritance must satisfy the farmer test at the valuation date. In the case of a gift of agricultural property, the need to satisfy the farmers test at the valuation date should not present too many difficulties as the transfer can simply be delayed until such time that the beneficiary has re-arranged their asset profile such that the test would be satisfied. The position with regard to inheritances is a little more difficult as often wills are drafted without due regard to the tax position of the beneficiaries. Care should be taken when drafting a will such that the devolution of the property to the desired beneficiary can be managed so that the beneficiary has the opportunity to rearrange their asset profile to satisfy the farmer test.

Conditional Gift or Inheritance

Where an individual receives a gift or inheritance subject to the condition that it is to be invested in agricultural property within two years of the gift or inheritance, it will qualify for agricultural relief as if it consisted of agricultural property:

• at the date of the gift or inheritance, and
• at the valuation date

If the condition is not satisfied the gift/inheritance will revert to the disponer. With regard to a conditional inheritance, the two year period runs from the date of inheritance (which is normally the date of death). This places pressure on the executors to ensure that the administration of the estate is dealt with in a speedy manner to ensure that the beneficiary is not deprived of their inheritance and has an opportunity to make the necessary investment.

Clawback of Relief

Agricultural relief will be withdrawn if, within 6 years commencing on the date of the gift or inheritance the agricultural property (other than crops, trees or underwood) is disposed of or compulsorily acquired in the lifetime of the donee or successor (as provided by section 89(4) CATCA 2003). The clawback can be avoided if, within a year of the disposal (or within 6 years of a CPO), the proceeds of sale are fully expended in acquiring other agricultural property. Where the proceeds of the disposal are not fully expended in acquiring other agricultural property relief will be clawed back in respect of the amount of the proceeds not re-invested.

It seems strange that an exemption from the clawback would be granted in respect of the disposal proceeds of crops, trees or underwood but not in respect of livestock or bloodstock. As is the case with crops, a person inheriting say fattening cattle is likely to dispose of them in a short period of time in the course of their farming business.

The author understands that it is accepted by Revenue that the proceeds from a disposal of agricultural property that needs to be expended in acquiring other agricultural property in order to avoid the clawback are the net sale proceeds after CGT, where the CGT is paid out of the disposal proceeds. It is understood that Revenue also accept that the expending of proceeds of disposal on the construction of new agricultural buildings on other land held by the farmer or the expending of proceeds on the demolition of old agricultural buildings on such other land and their replacement by the construction of new agricultural buildings will not result in a clawback of the agricultural relief. This is on the basis that the new or replacement agricultural buildings improve the value of the agricultural lands on which they are built.

To avoid the clawback, it was previously possible to undertake the following (where a farmer had more than one parcel of land of the requisite value and was married):

1. Farmer “X” transfers the land that is not to be disposed of (and is not subject to an agricultural relief retention period) to the farmer's spouse “Y”;
2. X sells the land on which the clawback would occur to a third party;
3. X buys back the land that was transferred to Y thereby making a re-investment and avoiding the clawback of relief.

The above inter-spousal transfers would not have crystallised a tax charge. The benefit was that the proceeds of sale could be retained by the family in a tax efficient manner and the need to purchase farm land in an accelerated fashion was removed. Finance Act 2010 provided that where agricultural property is bought back from a spouse that that purchase would not amount to a re-investment in agricultural property for the purposes of avoiding the clawback of agricultural relief.

There is an extended clawback period of 10 years for agricultural land with development value. Where agricultural relief has been granted in respect of the development value of development land, agricultural relief will be clawed back if the land is disposed of in the period commencing 6 years after the date of the gift or inheritance and ending 10 years after that date. It is important to note that there is no provision to make a re-investment to avoid the clawback where the extended clawback period applies (i.e. between years 6-10).

Conclusion

Agricultural relief is a very generous relief and of great value to those succeeding to agricultural property. Care should be taken to ensure that the relief is available with the main consideration being the satisfaction of the farmers test. Where the agricultural assets are to pass by way of an inheritance, care should be taken in the drafting of the will to ensure that flexibility is available with regard to the farmers test for the potential successor.

Mark Doyle, Director, Doyle Tax Consultants Ltd

M: 087 2928769

D: 01 4428715

E: mark@doyletaxconsultants.com

W: www.doyletaxconsultants.com