Leasing land long term has many advantages for both the landowner (lessor) and active farmer (lessee) utilising the land, writes Gordon Peppard, Farm Business Structures Specialist, Teagasc.
Why are landowners considering long-term land leasing?
Profitability of existing enterprise
Some traditional farming enterprises may be coming under pressure to support a family farm income, many beef, sheep and tillage farmers are required to work part-time away from the farm to provide an adequate income to support their families.
Successo’s s situation
There are farms that have no identified successor or the successor is not ready to take over the farm. The current farmer may want to cut back or retire altogether.
Long-term land leasing ensures ownership of the land is retained should a successor require it in the future.
Enhanced tax relief incentives
Enhanced Income tax incentives make leasing more attractive to landowners who do not wish to farm the land themselves. These tax incentives are shown below in Table 1 below.
Table 1: Income Tax Incentives for Long-term Land Leasing
|
Term of Lease (Years) |
Max Tax-free Income/year |
|
5 – 7 |
€18,000 |
|
7 – 10 |
€22,500 |
|
10 – 15 |
€30,000 |
|
>15 |
€40,000 |
If Basic Payment Scheme entitlements are leased out with the land, (seek advice from agricultural advisor in relation to the correct transferring of these entitlements), the value of these entitlements can be included with the land lease fee and qualify as tax free income under the relevant thresholds. These entitlements should be detailed in the lease agreement.
If the land is co-owned between a husband and wife, for example, the relevant thresholds shown in Table 1 can be doubled. Legal proof of co-ownership such as land registry folios naming both parties as co-owners will be required.
Opportunity for improvements/investment in the land.
There is generally a willingness of the lessee to invest/improve the land during their tenancy, through liming, improving soil fertility, reseeding program, maintenance of fences etc. where a long term commitment is made.
Qualify for retirement relief from Capital Gains Tax on transfer or sale of the farm
Land can now be leased for up to 25 years without impacting on the landowner’s ability to qualify for Retirement Relief from Capital Gains Tax. Where land is let on a con-acre basis for more than 10 years, the landowner may not qualify for Retirement Relief on Capital Gains Tax if the farm is sold or transferred to a family member.
Leasing the land long-term provides the structure to avoid this happening.
What are the advantages for the lessee`s (active farmer) of a long-term land lease?
- Security of tenure
A lessee can make plans their farm business in terms of lands available to farm, stock carried and crops grown etc. It gives more certainty to the business, the scale of farming operations and may provide expansion opportunities. - Better financial justification for the required investment
The lessee can justify financial investment in any improvement works that are necessary to the land in order to farm it productively. Such investments may include: reclamation, soil fertility, reseeding, roadways, fencing and the provision of adequate water supply - Farm buildings may come with the land that will reduce capital investment
Making use of existing facilities can greatly reduce any capital investment required in buildings. Such investment may include animal housing, slurry storage and silage facilities.
What does a long-term landlease involve?
A land lease is a written legal agreement between a landowner (lessor) and an active farmer (lessee) utilising the land.
The lease is signed by both parties, witnessed by an independent person and stamped by revenue.
The basic details that are included in a lease are.
- Length of the lease
- Annual payment and payment procedure
- Details of the land use and the upkeep of the land.
- Insurance
- Treatment of Basic Payment Entitlements
- A clause preventing subletting
- The lease must be stamped by Revenue and registered with the Property Services Regulatory Authority (PSRA).
- The people involved sign up to the conditions contained in the written lease agreement. The lease agreements should be tailored to suit the needs of both the lessor and the lessee, seek professional legal advice.
Stamping the lease
The lease must be stamped by Revenue and registered with the Property Services Regulatory Authority. Where the lease is six years or greater the lease is stamped at a zero value and no stamp duty is payable. Where the lease is five years the stamp duty is charged at 1% of the annual lease fee. This should be paid within 30 days of the commencement of the lease.
General
If the income from long term leasing of lands that is qualifying for income tax relief is the only income on the farm, then this is regarded as non-reckonable income for the purposes of PRSI contributions.
The individual may be best advised to make voluntary contributions to Revenue in order that their requirements for social insurance benefits, including the State Pension (Contributory) are met.
It is therefore essential that the landowner should discuss with their Accountant/Dept. of Employment Affairs and Social Protection and Revenue in relation to PRSI contributions and Universal Social Charge payable on this income.
To qualify for the income tax incentives, land can only be leased to non-relatives. The only exception to this is where an uncle/aunt leases to a nephew/niece.
If leasing to a niece/nephew it is very important to seek taxation advice, as to transfer the land to this niece/nephew down the line could have significant tax implications.
Where the lessee is farming through a limited company, the company can now qualify the landowner for the income tax incentives. A person connected with the company cannot lease to his/her connected company and avail of the income tax exemptions.
Summary
Long term leasing can be very beneficial for both the landowner and the active farmer. It may make sense financially to both parties as it allows the active farmer to better justify any required investments and the landowner has the benefit of the income tax incentives.
*Ensure to seek legal and financial advice to ensure that all requirements will be met to avail of Capital Gains Tax relief in the future.
Like with any major decision involving land and/or buildings, independent legal advice from a solicitor and taxation advice from an accountant should be sought before entering into any Long-term Land Leasing agreement.
For further information please contact your advisor or visit the Teagasc website.
Video source: Teagasc YouTube
