We will look at some tax tips when you sell or rent land. For this, a sale will be to a third party. Land sales are like hen’s teeth. Very rare. It is more common to transfer to the next generation.
In the current climate land is achieving a high price on a sale or rental. There is huge demand from the farming sector with record prices for dairy products. Milk is the “white gold” but farmers work damn hard to earn it. Plus, they don’t tend to hold onto it for too long. Tractors aren’t cheap.
The main areas of focus will be
- Introduction
- Sell land – 40 acres
- Sell land – 10 acres
- Rent the land
- Summary
Introduction
Podge Molloy is 64 and has a small beef farm of 50 acres which he has been farming for the last 30 years. He inherited 40 acres when his father Mike passed away in 1992. The value of the farm at that time was €100000. His brother Noel died suddenly at the end of 2017, and he left Mike 10 acres in his will. That is 3 kilometres away from the main farm. It’s good land and its value was €10000 per acre at the time.
Dolly Molloy, Podge’s better half, is a primary school teacher and is retiring soon. She will get an annual pension of €35000. Her plan is to travel, but not on her own like Shirley Valentine. She wants Podge to go with her. Bungee jumping in New Zealand and shopping in Dubai are on her bucket list. A few pints in O’Neill’s during Cheltenham is at the top of Podge’s list.
They have two kids. Mary is in Australia and looks like she will stay there for a few years. Fred is a stockbroker in Dublin and has no interest in farming. Saying that he wouldn’t say no to getting the farm and will help out his dad when he can. He knows his dad would like to take things a bit easier and is anxious to know his options. Fred introduces his dad to Bill O’Toole, a tax consultant mate of his, and they set up a meeting.
Sell land – 40 Acres
The first option is to sell the land. Podge thinks he’d get at least €15000 per acre and that the main farm could be worth €650000 with the farm buildings. So, €800000 all in. The big question for him is to know what he would be left with after all the tax winged its way to the State coffers.
Bill gets excited now and is pressing buttons on the calculator like a maths professor. The sale of 40 acres would look like this
| Sales Proceeds | €650000 |
| Less costs legal, auctioneer, tax | €15000 |
| Net Proceeds | €635000 |
| Less Cost of Land | |
| 1992 €100000 x 1.356 | €135600 |
| 2012 Farm Building | €40000 |
| Gain | €459400 |
| Tax Payable 33% | €151600 |
Podge nearly chokes on his false teeth when he sees the number and has taken a disliking to Bill.
Retirement Relief
Bill tells him not to panic. This is a worst-case scenario as there are Capital Gains Tax reliefs available. One such relief is Retirement Relief. Bill thinks Podge should get this relief as he
- Owns the land for more than 10 years
- Has farmed the land for more than 10 years
- Is over 55
If he sells this parcel of land and can get Retirement Relief, there would be no CGT to pay. Bill is growing on Podge. To maximise the relief Podge should sell before he hits 66. If he waits until he is 66 or older there would be tax to pay. The amount of relief at 66 or over, on a sale to a third party, reduces to €500000. As a result, the tax is
| Sales Proceeds | €650000 |
| Retirement Relief threshold | €500000 |
| Excess | €150000 |
| 50% of excess | €75000 |
Entrepreneurs Relief
Entrepreneurs Relief [ER] is another relief from Capital Gains Tax. Provided you meet the conditions the rate of CGT reduces from 33% to 10% on sales proceeds of up to €1 million. This is a lifetime limit. There is no age rule but you must
- own the asset for 3 years or more and
- spend more than 50% of your time in the business. That time spent must be in a managerial or technical capacity
So, ER would work better in the event of a sale after 66. Using the numbers above
| Gain | €459400 |
| Tax Payable 10% | €45940 |
Using ER instead of RR would result in a saving of €29000.
Sell land – 10 acres
Should Podge sell the 10 acre parcel of land he will pay some tax. Retirement relief isn’t an option on the sale of this part. Because he doesn’t own it for 10 years as he got it in early 2018 after Noel’s death. He could get ER on it though as he owns it and has farmed it for more than 3 years. Using a value of €15000 per acre the numbers would look like this
| Sales Proceeds | €150000 |
| Less legal, auctioneer, tax | €7500 |
| Net Proceeds | €142500 |
| Less Cost/Value | €100000 |
| Gain | €42500 |
| Tax Payable 10% | €4250 |
The idea of selling this parcel appeals to Podge as he would have €138000 left. He could treat Dolly to a few nice meals out and trinkets from Dubai with that.
Rent the land
There are tax advantages to renting land for 5 years or more. The main conditions are
- A lease in writing and stamped
- Be for a term of 5 years or more
- Let for farming
- Not be to a connected person
The maximum relief for a lease of 5 years or more but less than 7 years is €18000 per annum. The climbs to €22500 per annum for a lease of more than 7 years up to 10 years.
Podge knows that the dairy farmers around him would have a huge interest in renting his land. At €400 per acre, it would come to €20000. Added to that is the value of single farm payments at €10000 bringing the rent to €30000. Bill confirms that if he signed a lease for 10 years the annual reduction is €30000. He would pay no Income Tax on the full €30000. While Podge loves that idea, he thinks a 10 year lease is too long.
If he went for a 5-year lease, he would get a deduction of €18000 from the €30000 rent and pay tax on €12000. Bill confirms that all their income would be liable to tax at the lower rate of 20%.
| Pension Dolly | €35000 |
| State Pension – Podge | €13000 |
| Taxable Rental Income | €12000 |
| Total Income | €60000 |
| Tax liability – 20% | €12000 |
| Less Tax credits – Married | €3550 |
| PAYE x 2 | €3550 |
| Net Tax liability | €4900 |
There will be no PRSI from 66 and there will be some USC. Ignoring those taxes their effective tax rate is 8.16% [€4900/€60000]. Very attractive indeed.
Future Transfer after renting
Podge wants to know the downside of renting the land if he wanted to sell it or transfer it to the kids at a later stage. On the 40 acre parcel of land, Retirement Relief will continue to apply on a future sale provided
- The land isn’t let for a period longer than 25 years and
- The lease must be for a minimum of 5 years
The 5-year lease period under point 2 above only applies on a sale or transfer to a third party. If there was a sale or transfer to a child there is no set lease period. The key is that Podge qualifies for RR before entering the lease.
On a future sale or transfer of the 10 acre parcel, he would pay full CGT on that at 33%. Remember there was no RR on that part but there was ER. Once he lets the 10 acres it becomes an investment asset. Podge would no longer be farming it so not spending more than 50 of his time working it, per the rules.
Summary
There are many farmers out there like Podge. Farming away and working hard but no one coming up to take over. Letting is an attractive option but delays the inevitable decision. Selling or transferring to the next generation if there are children. Those who own and farm the land for 10 years or more are in a good position on a future sale or transfer.
We will look at a transfer to the next generation in a future blog. The reliefs mentioned here are relevant to that, but other taxes come into play. CAT [Gift/Inheritance Tax] and Stamp Duty to name a few. You don’t have to know the ins and out of all the taxes. But having some knowledge is helpful to plan for your situation.
Need to know what taxes you’ll pay on a land sale or transfer? If so, start here
