Maximise profit in selling and purchasing land

There is a lot of farm land fragmentation in Ireland, and the problem has been getting worse in recent years, according to Teagasc.

Its research has found that in 2010, more than 80,000 farms had three or more separate land parcels.

“Extra labour, travel time, stock movement and inspection, extra machinery and facilities, and crossing roadways are some of the issues that arise from fragmentation,” it said in its latest farm management advice.

To meet the new competitive challenges in the future, farms will need to reduce fragmentation and enlarge their holdings, according to Teagasc, and there are two taxes chargeable on selling and purchasing land: firstly stamp duty charges on land purchased, the current rate is two per cent; and, secondly capital gains tax on land disposed of during lifetime, the current rate is 33 per cent.

When a farmer ‘disposes of’ farmland during his lifetime – by sale, gift or exchange to another person – capital gains tax rules apply.

Teagasc has advised that capital gains tax on the lands disposed of can be substantial, due to the rapid rise in land values in recent years.

“This new relief is aimed at improving the viability and efficiency of farm holdings.”

It elaborated: “It provides a relief from capital gains tax where a farmer sells and purchases qualifying land in order to consolidate his or her farm. The sale and purchase transactions for qualifying land must be within 24 months of each other and the initial transaction must also be within the scheme period (January 1, 2013 to Dec 31, 2015).

In terms of the conditions which a farmer must satisfy, Tegasc outlined the criteria.

“When applying for farm restructuring relief to the Revenue Commissioners, the farmer must sign a declaration that it is his or her intention for a period of five years from the date of execution of the deed of transfer:

1. to spend not less than 50 per cent of his or her normal working time farming;

2. to farm the lands purchased; and,

3. to retain ownership of the lands.

With regard to the  Farm Restructuring Certificate (FRC), this is a certificate issued by Teagasc to the farmer restructuring his or her farm where the sale and purchase transactions meet the restructuring conditions.

“If the restructuring conditions are not met, Teagasc will give reasons why it cannot issue an FRC and there is scope to appeal.”

The farmer applies to Teagasc filling out the FR1 application and supplying supporting documentation for existing lands owned and

farmed and the sale and purchase transactions. According to Teagasc, the documentation required includes legal documentation, maps of the lands, LPIS numbers under the single payment system and so on.

Teagasc advises that it is important that the farmer is fully aware of the conditions to be met for the relief before land transactions take place. The guidelines document is available to download here.

Teagasc gives an example of the potential savings on capital gains tax.

It’s example:

1. John sold a parcel A (10ha) which is five miles away for €260,000 with disposal costs of €6,000, giving a net disposal value of €254,000.

2. John purchases parcel B (12ha) across the road from his farmyard for €270,000. Both parcels are qualifying land.

3. Parcel A was acquired in February 1982 for a cost (including expenses) of €30,500.

4. This acquisition cost is adjusted upwards for inflation (indexation relief) using the CGT multiplier (€30,500 x 2.678 = €81,679).

5. Capital gain = €254,000 – €81,679 = €172,321.

6. Deduct annual CGT allowance €1,270

7. Capital gains tax = €172,321 – €1,270 = €171,051 @ 33% tax = €56,447 tax due, unless relief applies.

8. He now qualifies for restructuring relief (because of less distance between land parcels) and obtains a farm restructuring certificate from Teagasc.

9. The value of land purchased exceeds the value of the land sold and all proceeds were invested.

10. The saving in this case is €56,447.

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