The agricultural relief under the Capital Acquisitions Tax (CAT) - which is a tax on inherited or transferred property - has been at the centre of a tricky policy question over the last couple of years.

Ahead of Budget 2025 - which was announced in October 2024 - concerns were raised that the agricultural relief under CAT was being used be some landowners - who were not necessarily farmers - to transfer wealth, and that this could inflate land prices.

Ahead of that budget, proposals were made from the agri-sector to extend the conditions of agricultural relief to ensure it was availed of by genuine farmers and that it would facilitate generational renewal and farm succession.

Therefore, the government announced in Budget 2025 that it would impose additional conditions under the relief on the disponer (the person transferring the land).

Agricultural relief under CAT operates by reducing the market value of the agricultural property by 90%, so that the inheritance or gift tax is calculated on an amount - known as the 'agricultural value' - which is 10% of the market value.

To qualify for the relief, the beneficiary (the person receiving the property) is required to farm the agricultural property commercially for at least six years after receiving the property, or lease it to someone who does.

This is known as the 'active farmer test'.

In that budget announcement two years ago, the government said it would extend the active farmer test to the disponer.

That would mean that the disponer would have had to farm the land (or lease it to someone who did) for six years prior to the gift or inheritance being made, bringing to 12 years the total continuous period of time the land would have to be farmed.

This was done with the aim of better targeting the relief to genuine farmers and farm families.

However, as soon as that change was announced, farm organisations raised further concerns that the new active farmer rule would open up a new problem for farm families.

It was feared that the active farmer test for the disponer could result in the beneficiary being unable to avail of the relief in certain cases; for example, if the disponer could not actively farm the land in the last few years of his or her life due to illness.

For that reason, the government agreed to make the changes subject to a commencement order, so that they would need to be signed off on by the minister of finance of the day before taking effect.

This was done with the aim of engaging with stakeholders in order to come up with a solution; however, one has not been found, and the commencement order remains unsigned.

Policy options

This sticking point was among the areas covered in the recently-published Tax Strategy Group (TSG) papers.

These annual documents outline key considerations on national taxation to inform the minister of finance and his department ahead of each national budget; in this case Budget 2027, which will be announced later in the year.

The TSG has been in place since the early 1990s and is chaired by the Department of Finance, with its membership comprising senior officials and political advisers from a number departments and offices.

Nothing in the TSG papers serves as an actual policy recommendation, but the documents do provide a survey of current policy questions and possible solutions, and are likely to feed in the national budget in some form.

One of the documents, on capital taxes, noted that, under the recommendations contained in the report of the Commission on Generational Renewal in Farming, which was published last year, significant engagement with agri-sector stakeholders should take place before the government commits to a course of action on agricultural relief under CAT.

The document said that this engagement has taken place, and that stakeholders raised a range of concerns, and outlined several scenarios in which farm families could end up deprived of agricultural relief under the changes.

The TSG document then went on to examine how issues around farm inheritances are dealt with in certain other countries, before arriving at three "policy options" for the Department of Finance in Ireland to look at.

These options are:

Option A: The new active farmer test rule is put into effect with the aim of dealing with the purpose it was designed for; namely limiting tax planning activities by wealthy individuals looking to minimise exposure to CAT. The document acknowledges there would be some consequences for a small group of farmers who are unable to meet the additional disponer requirements;
Option B: Repealing the legislation around the new active farmer test, effectively cancelling the announcement made in Budget 2025, and accepting that the 'cons' of the new rule would outweigh the 'pros';
Option C: Developing a whole new system of agricultural relief that would solve both problems. The TSG paper suggests something like the UK model, where a lower rate of relief on inheritance tax (as opposed to a flat 90% relief in Ireland) applies when certain conditions aren't met, and on property above a certain value. However, the document also acknowledged that the inheritance tax system in the UK, and proposed changes to it, have been beset by opposition from farmers there.

Notwithstanding the policy challenges around how to apply the active farmer test, the document importantly noted that agricultural relief from CAT is "an essential relief for ensuring the continuity of the farming sector from generation to generation".

"Without it farms could become unviable because of tax liabilities. Therefore, the relief as currently structured serves an important function," the document said.