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With the 15 May deadline for Basic Payment Scheme (BPS) applications drawing near, I am receiving a lot of queries about the pros and cons of leasing out land long term. There is a lot more to consider, in the decision to lease land long term, apart from what is contained in the lease agreement. Let’s look at entitlements and tax.
Could I lose my entitlements with CAP Reform?
The new CAP is due to kick in from 1 January 2021, it could be later. Landowners are concerned that if they lease out all their land that they could lose their entitlements under the revised CAP. It is difficult to know how this will pan out.
Let’s look at what happened in the last round of CAP reform.
Landowners that leased out all their land and entitlements in 2013 did not get an allocation of BPS entitlements under the new CAP. However, those landowners typically sold their entitlements to the person renting the land and got 2.5 times the annual payment.
So for these landowners, who were perceived to have lost out, they actually did not do too badly
They got this free of capital gains tax (CGT) as an exemption was announced a week before the deadline. They then got a premium rent for “naked land” as young farmers were able to apply for “free” entitlements under the National Reserve on this land. So for these landowners, who were perceived to have lost out, they actually did not do too badly.
If a landowner had leased out most of their land but had retained at least one hectare and one entitlement and had applied for the single farm payment (SFP), they were considered “active farmers” and thus entitled to establish new BPS entitlements.
The entitlements are normally leased with the land to the tenant
Taking this on board, landowners are consequently being advised to retain some land and entitlements (minimum of three entitlements and three eligible hectares) and to continue submitting the BPS application on this land.
The entitlements are normally leased with the land to the tenant. The BPS rules provide that the person who claims the entitlements has to farm the land from the beginning of the year to a date after 31 May or from a date before 31 May to the end of the calendar year. So if the tenant is in occupation of the land before 31 May he/she should also be claiming the entitlements.
The tenant would draw down the entitlements and pay a percentage over to the landlord. Historically, 100% of the BPS payment was paid over, but in recent years it is expected a percentage is paid over in the region of 60-90% depending on whether the entitlements are high value or not. This is to compensate the tenant for the risk he/she takes in drawing down the payment.
If the tenant got fined on his/her BPS payment, it is normally a percentage across his own entitlements and those leased in. The lease normally stipulates that the tenant has to pay over the entitlements relating to the leased land regardless of whether there is a penalty or not.
Are there negative tax consequences in the future by not actively farming the land?
As I deal a lot with succession planning for farm families, it is important to ensure that the decision to lease out land long term does not trip up the landowner down the line in terms of qualifying for tax reliefs when they hand over the farm to the next generation. Examples of where it could have a negative impact are as follows:
1 Where the farm was gifted/inherited/purchased in the previous 10 years.
In order to qualify for CGT retirement relief, the landowner must have owned and farmed the land for 10 years before the transfer. A landowner can lease out the land for up to 25 years and still qualify for CGT retirement relief provided that they owned and farmed it for 10 years before they first started leasing the land. So if they lease it before they have farmed it for 10 years, the can lose out on CGT retirement relief down the line.
2 Where the land is transferred into joint names to increase the income tax exemption limit.
In those circumstances the spouse would not have the required 10 year holding period to qualify for CGT retirement relief.
3 Where a child/niece/nephew will not qualify for CAT agricultural relief.
In order to claim business relief, the child/niece/nephew must take over the farming business as a going concern – if the land has been leased out, typically there is no longer a farming business and thus the successor cannot qualify for business relief.
While the income tax incentive encourages many to lease their land long term, there are many other considerations in making a decision to lease land long term including practical, legal and tax considerations and landowners should ensure that they get advice in respect of all aspects before making a decision to lease land long term.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, Agricultural Solicitors does not accept responsibility for errors or omissions howsoever arising. Email info@agrisolicitors.ie
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