Agri-Business: Navigating Agricultural Relief Rules

Agricultural Relief is about facilitating the succession of farm businesses to new generations of farmers. It is part of the Capital Acquisitions Tax (CAT) system in Ireland. In simple terms, it reduces the Capital Acquisitions Tax that you pay on farm transfers.

Under normal Capital Acquisitions Tax conditions, you would pay 33% tax on the total market value of the farm. Agricultural Relief reduces the total market value of the farm by 90%, significantly reducing the amount of tax that has to be paid.

In this blog, we are going to look at the core rules around Agricultural Relief, focusing on who can qualify. We’ll also cover the main practical steps and planning you should undertake now to optimise your tax position and/or the tax position of your successors.

Agricultural Relief Explained and Who Qualifies

There are two main conditions to qualify for Agricultural Relief. The first is an active farmer test, and the second is an asset test.

Active Farmer Test

The conditions for qualifying under the active farmer test include:

• The farm must have been commercially farmed for at least six years from the date of valuation. This can include being farmed by the owner or farmed by someone who has leased the farm from the owner.
• The beneficiary (the person receiving the farm business) must either farm the agricultural property in question for at least 50% of their working hours or hold a recognised farming-related qualification.

Asset Test

To qualify under the asset test, at least 80% of the beneficiary’s total gross assets must be agricultural property. This is one of the areas where Agricultural Relief becomes complicated. We have given an overview below, but it is important to get professional advice to understand your position (and, potentially, the position of your successor) in relation to the asset test.

Under the Agricultural Relief asset test rules, all the property owned by the beneficiary is taken into account. This includes the farm being gifted or inherited, as well as property owned prior to the gift or inheritance. For example, this can include:

• Property owned prior to the farm gift or inheritance – residential property, car, and bank savings.
• Farm property gifted or inherited – farmland, farmhouse, livestock, and machinery.

The asset test is based on the gross total of assets based on a current market valuation. Some deductions are allowed, and some are not, e.g., an outstanding mortgage on the beneficiary’s house cannot be deducted, but a loan taken out to improve the house can be deducted. This again highlights the importance of getting professional advice.

Asset Test Example

The beneficiary currently owns:

• House – €175,000
• Car – €8,000
• Savings – €3,000

The beneficiary of the farm is going to inherit:

• Farmland – €600,000
• Livestock & machinery – €200,000

The total value of the agricultural property is €800,000, so it will constitute 81.1% of the beneficiary’s total gross assets after they inherit the farm. Therefore, the beneficiary qualifies under the asset test for agricultural relief.

In this case, as the criteria for Agricultural Relief are met, the total market value of the agricultural property for the purposes of calculating CAT is reduced by 90%, i.e., from €800,000 to €80,000. Without Agricultural Relief, the beneficiary would have to pay €264,000 in CAT (33% of €800,000). With Agricultural Relief, the individual who inherits the farm is liable for just €26,400 (33% of €80,000).

Interactive Agricultural Relief Comparison Calculator

Use the slider to adjust the farm value to see how much can be saved on CAT using Agricultural Relief.

What is Classified as Agricultural Property in Relation to Agricultural Relief?

It’s also helpful to understand what the Revenue considers as agricultural property for the purposes of Agricultural Relief.

Agricultural property includes:

• Agricultural land, pasture, and woodland in Ireland, the UK, or any EU country.
• Crops, trees, and underwood growing on the land.
• Farm buildings, including certain houses situated on the land.
• Livestock, bloodstock, and farm machinery.
• Entitlements to farm payments according to EU regulations.

Agricultural Relief Tips

• Formalise your leasing arrangements. This particularly applies if the current owner is retired, so is not farming the land. Without a formal leasing arrangement, the farmer might not be considered an active farmer under the Agricultural Relief criteria.
• There are certain conditions under which the Revenue can withdraw or clawback Agricultural Relief. An example is if the beneficiary of the farm gift or inheritance disposes of any part of the property within six years and doesn’t replace it with other agricultural property. It’s important to understand these clawback circumstances in advance.
• Other tax liabilities and reliefs can be applicable in some circumstances, so Agricultural Relief shouldn’t be considered in isolation.

Support from Gilroy Gannon

Our tax experts have extensive experience serving the farming community, including help with farm succession planning, Agricultural Relief, and related issues. Get in touch to arrange a consultation and get advice on your specific situation.