A farm may be worth €2m. That does not mean there is €528,000 sitting in the farm account to pay a tax bill. Yet that is exactly the Capital Acquisitions Tax bill that could arise where a son or daughter inherits a €2m farm and cannot claim Agricultural Relief.
If the relief applies, the taxable value of qualifying agricultural property is reduced by 90%. A €2m farm becomes €200,000 for CAT purposes. If the child still has their full €400,000 group A threshold available, no CAT arises.
The difference is, therefore, between a tax bill of €528,000 and no CAT at all. Land values have risen considerably over the years, but the income generated by the farm has not necessarily risen with them. Without the relief, many farm successions could result in a tax bill that can only be paid by borrowing heavily or selling part of the farm.
At ifac, we have been involved in the development and protection of Agricultural Relief since the major changes to the relief in the early 1990s. The principle behind it remains as relevant today as it was then: the capital value of a farm and the income available from farming it are two very different things.
What is CAT?
Capital Acquisitions Tax, or CAT, is the tax that can arise when someone receives a gift or inheritance. The person receiving the property is generally the person liable for the tax. How much they can receive tax-free depends principally on their relationship with the person giving them the property.
For most farm successions from parent to child, the important figure is the group A threshold of €400,000. The current group B threshold is €40,000 and group C is €20,000. Gifts and inheritances between spouses or civil partners are exempt.
These are lifetime thresholds. If a child has already received gifts or inheritances falling within group A since 5 December 1991, those benefits have to be taken into account when working out how much of the €400,000 remains. CAT is charged at 33% on the amount above the available threshold. For a farm family, this is where Agricultural Relief can make an enormous difference.
So what exactly is Agricultural Relief?
Agricultural Relief reduces the taxable value of qualifying agricultural property by 90%. A farm worth €1m is treated as having a taxable value of €100,000. A farm worth €2m is reduced to €200,000.
That reduced value is then considered together with any previous gifts or inheritances and the recipient’s available CAT threshold.
Agricultural property can include farmland, pasture and woodland, farm buildings, an appropriate farmhouse, livestock, bloodstock, machinery, crops, trees and farm-payment entitlements.
One important exception is shares in a farming company. Shares are not agricultural property for Agricultural Relief, although Business Relief may instead be available. There are two main tests that farm families need to understand.
Farmer test
Could your other assets cost you the relief?
The first is what is commonly called the 80% farmer test. After receiving the gift or inheritance, at least 80% of the gross market value of everything the recipient owns must be agricultural property.
The farm being transferred is included in that calculation.
This is important, because being a farmer in the ordinary sense of the word does not necessarily mean that you are a farmer for Agricultural Relief.
Take someone who has been farming alongside their parents for years. They may own a house, have accumulated savings while working on- or off-farm and have investments or other property. Those assets all matter when the 80% calculation is done.
A person can therefore be genuinely committed to farming and still fail the test.
Most debts are not simply deducted when carrying out the calculation, although there is a specific allowance for certain borrowings used to buy, repair or improve a principal private residence which is not itself agricultural property. Do not assume that a son or daughter qualifies because they work on the farm. Look at what they actually own and run the numbers.
Does the son or daughter have to farm it themselves?
Not necessarily. The second major condition is the active farmer test.
For at least six years, the agricultural property must be farmed on a commercial basis and with a view to making a profit.
The person receiving the farm can farm it themselves. Alternatively, at least 75% of the market value must be leased to someone who meets the active farmer requirements.
The person actually farming the land must either have a recognised agricultural qualification or spend at least 50% of their normal working time farming. Revenue’s rules also provide for circumstances where the necessary qualification is obtained after the gift or inheritance.
A child does not necessarily have to give up their existing career and become a full-time farmer simply because they inherit the family farm. A qualifying lease to an active farmer can also satisfy the rules.
However, the arrangement needs to be considered properly. The fact that somebody is cutting the grass, grazing a few cattle or helping around the farm does not automatically mean all of the conditions have been met.
What happens if the farm is sold?
If agricultural property is sold within six years, some or all of the Agricultural Relief claimed can be clawed back.
There is relief where the proceeds are reinvested in qualifying agricultural property. Generally, the reinvestment must take place within one year of the sale. A longer six-year period applies in the case of a compulsory acquisition.
An onward gift during the six-year period will also create a clawback.
And what about Business Relief?
Agricultural Relief is not the only CAT relief relevant to farms. Business Relief can also reduce the taxable value of qualifying business property by 90%. It can be particularly important where a farming business is operated through a company because company shares do not qualify for Agricultural Relief.
It may also be relevant where a successor cannot satisfy the 80% farmer test, but is getting a farming business and will continue this farming business.
The two reliefs should therefore be considered together where there is any doubt. They can sometimes produce the same result, but they do not work in the same way.
Could these rules change?
Yes, and this is an area farm families should continue to watch. Section 89A was enacted in Finance Act 2024 as a replacement for the existing Agricultural Relief provisions, but it was drafted to come into operation only when commenced by the Minister for Finance. The existing section 89 therefore remains in place while section 89A awaits commencement.
The significance of section 89A is that it would introduce much greater emphasis on what happened before the farm was transferred, including conditions applying to the person transferring the property.
That is why changes to Agricultural Relief need to be considered carefully. And that brings us to the first example.
Case study one: when illness changes the succession plan
We regularly see families where a farmer continues working well into their seventies before ill health suddenly changes everything.
A son or daughter starts doing more of the day-to-day farming. There may be no formal lease and no written partnership agreement. Everyone in the family knows who is farming the land, so the paperwork is left for another day.
Consider a father who continues farming into his late 70s before becoming seriously ill and moving into a nursing home.
His son takes over the farm. There is no formal lease and the father’s own farming trade ceases.
Eight years later, the father dies and leaves the farm, worth €2m, to his son.
Assume the son has received no previous group A gifts or inheritances and satisfies both the 80% farmer test and the active farmer requirements.
The fact that the father had stopped farming does not, by itself, prevent Agricultural Relief from applying. The current section 89 focuses principally on the agricultural property and the position of the person receiving it rather than imposing a general requirement that the person who owned the farm must have actively farmed it throughout the previous six years.
If Agricultural Relief applies, the €2m farm is reduced to a taxable value of €200,000. The son has a €400,000 group A threshold available and no CAT is payable.
Without Agricultural Relief, the calculation is very different – €2m less the €400,000 threshold leaves €1.6m taxable at 33% and CAT payable of €528,000.
Where does that €528,000 come from?
Usually not from the farm bank account. It may mean substantial borrowing or selling land. Business Relief may be less straightforward in this example because the father’s farming business had ceased years earlier. Different facts, including a continuing partnership or business structure, could change that result.
The important point is that illness, incapacity and nursing-home care do not arrive according to a tax timetable.
The extension of the active farmer test to the father under section 89A, where the father had stopped farming because of ill health would result in relief also being denied. Meaning neither Agricultural Relief nor Business Relief would be available in this example.
Families should not deliberately rely on informal arrangements. But the tax system also has to recognise that real farming families do not always operate according to a perfectly documented succession plan. Where someone has already stepped back and another family member has effectively taken over the farm, it is worth reviewing the position now, rather than waiting until a transfer or inheritance takes place.
Case study two: helping a child buy their own farm
Agricultural Relief is not limited to transferring the home farm.
It can also be relevant where parents want to help a son or daughter buy agricultural property of their own.
Take a son who returns home after a number of years working in Australia. He has saved €100,000 and wants to establish his own farm.
His parents are not yet ready to transfer the home farm. Instead, they give him €500,000 on the condition that the money must be invested in agricultural property.
Within two years, he combines the €500,000 with his own €100,000 and buys a farm for €600,000.
Assume again that he has received no previous group A benefits and that he satisfies the 80% farmer and active farmer conditions.
Under the current Agricultural Relief rules, a gift or inheritance made subject to a condition that it is invested in agricultural property can qualify where the conditions are met and the investment is made within two years.
The €500,000 gift can therefore be treated as qualifying agricultural property.
Agricultural Relief reduces the taxable value from €500,000 to €50,000.
That is comfortably inside the son’s €400,000 group A threshold. Without the Agricultural Relief provision, the first €400,000 would be covered by his group A threshold but the remaining €100,000 would be taxed at 33% with CAT of €33,000 payable.
The introduction of section 89A would remove the existing provision, allowing a conditional gift of money to be invested in agricultural property. Therefore, in this example neither Agricultural Relief or Business Relief would be available. Artificial arrangements designed simply to secure a tax relief should of course be addressed. But there is a big difference between an artificial arrangement and an elderly farmer becoming ill, a son gradually taking over the home farm, or parents helping a child returning home to establish a viable farm.
Agricultural Relief is generous because it has to be.
A 90% reduction sounds extraordinarily generous until you look at what would happen without it.
A €2m valuation does not create €2m of cash.
Without Agricultural Relief, an ordinary farm succession can produce a tax liability that bears little relationship to the income the farm can generate. In the wrong circumstances, the only way to pay the tax may be to sell some of the land the relief was designed to keep together.
Questions to ask
Before a farm is transferred, every family should be able to answer three fairly simple questions:
If the answer to any of those questions is unclear, work through the Agricultural Relief position before the deed is signed.
The most difficult succession cases are rarely those where a family took advice too early. They are the cases where the farm was transferred, a lease was changed or a farming business ceased before anyone stopped to ask what that meant for the relief.
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