Real Estate Alliance

Changing Time for Agriculturual

• Traditional forms of agriculture as we know it are in decline and in my view it is vital that innovative thinking and entrepreneurial skills are encouraged so that rural communities can survive and thrive.  With the reform of the common agricultural policy involving a system of “Decupling” and direct payment to farmers has opened a new chapter in rural life which will require much greater concentration on quality, modernisation, added value and new businesses.  The single farm payment continues up till 2013 after which it will be completely reviewed by the EU.

• As the agri businesses decline so too will life in rural areas change dramatically and have a knock on effect.  For example the closure of both the Carlow and Mallow Sugar Factories does have huge implications for the tillage sector. For starters you have the loss of jobs in both of these companies, the loss of work for agricultural contractors, the haulers, the manufactories of the various types of machinery, the sudden lost of rotation for tillage crops and general agri businesses.  It is The IFA’s view that about 150 million euros will be taken out of rural circulation in the Leinster area and that’s only one industry.  If this continues in other sectors of the agri business, the family farm will no longer survive as we know it and without new investment creating jobs in rural areas emigration from the land and surrounding areas will happen and one could see the possibility of ghost villages returning as there is nothing to sustain the local economy for example with the beef trade at present it is interesting to note that under WTO rules beef can be imported from South America thus undermining our own meat industry but in the United States for technical reasons they can block all beef import from south America!  There are also serious difficulties with the nitrate directive which is essential for yields and if these directives go ahead as planned production must fall and therefore profit.  I am aware that the viability of rural Ireland as a society is now a serious matter and that studies has been carried out on this basis by the department of agricultural involving the advice of professors in UCD and Trinity College – Prime Time discussed this matter some weeks ago. 

The Price of Land

The income from lands has no bearing anymore on the price one pays for an acre of land.  The return on your investment is between about a quarter to one percent ie 100 to 175 years purchase.  One could say that land was decoupled from “Farming” when the land commission was paroled in 1987 resulting in the changing of the law encouraging long term leasing and the ending of compulsory purchase of land by the land commission.  The vendors were also unfortunate enough to be paid in land bonds – you could never win on this one.  Also the change of law brought about the automatic subdivision of ones folio number so now non farmers were able to purchase small parcels of land at lib.  Land is a scare commodity and with our booming economy together with transfer of wealth from abroad i.e. Irish who emigrated in the 60’s and 70’s now returning to live here, it is unlikely that land will decline in value.   Summing up while the income for farming is declining, the value of their assets will continue to rise and will find it difficult to compete for additional land on the open market with non farmers.

Land Lettings for 2006

• County Carlow is a rich agricultural County and so far land lettings for 2006 have being doing exceptionally well.  Land set for grass/meadowing/silage is averaging €150 to €225 per statutory acre and land set for tillage that is for barley/wheat/oats is in the region of €100 to €130 per acre.  Root crops including potatoes etc can vary from €150 to €270 an acre.  These prices are without entitlements and are on a short term bases known as a licence or the 11 month’s system.  Anything over a year are referred to as a lease.  The difference here may have implications in law.  Lands set with entitlements must be in writing for a period of 10 months or more dated from 1st September to the 30th of April in any year and will obviously command a higher a rent per acre.

Entitlements

Trading of Entitlements -

Farmers should note that the sale of entitlements without land will only be permitted where at least 80% of the entitlements have been used in 2005 i.e. the farmer selling the entitlements must have declared enough land in 2005 to enable payment to be made on at least 80% of his/her entitlements.

Entitlements may only be leased/rented out if accompanied by the lease/rent of an equivalent number of eligible hectares.

Claw-back on sales of entitlements
The levels of claw-back that will be applied to the selected transactions are as follows:

• Sales of entitlements without lands – 30%
• Sales of entitlements with lands where part of the holding is sold – 5%
• Sales of entitlements with an entire holding 2.5%

No claw-back will apply in the following circumstances

• Where the effective date of the sale agreement was 21 December 2005 or earlier.
• Transfer of entitlements (with or without lands) by way of gift (within families) or inheritance
• Lease of entitlements with land
• Rental agreements in respect of entitlements with land.
• Sale of entitlements (with or without lands) to new entrants to farming who satisfy certain objective criteria including age, income and educational qualifications.
• Sale of entitlements without land where the farmer selling used at least 80% of his entitlements in 2005, did no apply to consolidate, and is not simply selling the entitlements that were not used in 2005.
• VAT - With regard to VAT the extract from the Revenue Commissions document, published last November, on the subject is as follows; if payment entitlement is sold without land then VAT will be due at the standard rate on the sale if the sale proceeds exceed the relevant threshold for registration (currently €25,500 per 12 month period).  A farmer who exceeds the threshold by virtue of selling payment entitlement will be permitted to register for VAT in respect of that single transaction.  Non-VAT-registered farmers who purchase payment entitlements and suffer VAT will not be permitted to register in respect of the single transaction, but will have the normal registration option open to them.  In layman terms it means that the buyer has to pay 21% VAT if the seller has sold more than €25,500 of entitlement in any 12 months.  This is total proceeds, which rules out the seller splitting up entitlement sales to keep each one under €25,500 in a bid to avoid applying VAT.  Once the limit has been passed VAT has to be charged on everything i.e. selling €100,000 incurs a VAT charge of €21,000.  The seller has to charge the VAT and then has to register for VAT for the specific transactions.  The buyer can claim back the VAT only if he is registered.  There is no other option.  The only way the buyer can avoid paying VAT is to buy off a seller who is only selling €25,500 in the one year.  He can buy off a number of these sellers to accumulate large number of entitlements.  However, we note that there are very few sellers with less than €25,500 on offer.  The department forms for trading will be on the website shortly.  Both the buyer and seller have to sign the form, which details, which details the number, value and sum, paid.  Make sure all the details are filled out before you sign.  It cuts out any room for error.  Farmers buying setaside entitlements have to have eligible land to claim them.  The land must have been rested from 14 January and be farmed under the setaside conditions.  All setaside entitlements must be used before normal ones will be paid.
• Capital Gains Tax of 20% to be paid by the seller once their allowance of €1270 is breeched
• Entitlements obtained from the National Reserved may not be transferred for a period of 5 years.  This includes consolidated/stacked entitlements.  These entitlements must be used by the application each year for five years otherwise they will revert to the National Reserve.
• Ireland is seen as one region in the terms of entitlements there is no ring fencing or disadvantage/advantage areas.  This means a farmer in Cork can purchase entitlements from a farmer in Donegal.  There is no claw back when entitlements are sold with or without land to new entrants.  This makes new entrants a much sought after person by sellers.  The definition of a new entrant is the same as the one used for the National Reserve.  A new entrant is defined as a farmer who did not within five years, engage in a farming activity in his/her own name or at his/her own risk.  The applicant must be at least 18 years old on 1 January, 2006.  If under 35, he or she must have appropriate qualifications.  If over 35, he or she must either hold the appropriate qualifications of have at least five years experience in farming.
• One cannot stack bought in entitlements in any circumstances in the future.  You are however; allow to stack entitlements received by inheritance.
• Sale price – our office has not as yet sold any entitlements but sources inform me that some deals have been done at a multiple between 2 ¼ and 2 ½ times their value.

PAYMENTS

Table 1.

Payments making up the ‘entitlement’ per ha.

Table 2. Estimated Entitlement by Farm System in Ireland 2007

Each person’s entitlements are subject to certain reductions as follows a reduction of up to 3% to create a National Reserve and (B) a reduction of 3% for modulation i.e. to create a fund for rural development measures, a further reduction is possible in the event that the sum of individual entitlements exceed Irelands National Ceiling.

Long Term Leasing

• The minister for finance in the last budget has increased the benefits of those qualifying for long term leases of farms. For leases of five to seven years the income tax exemption increases from 7500 to 12000 euro per year, while the lease from seven years or more has increase from 10 to 15000 per annum.  These increases are effective for new leases from January 1st 2006, the lesser must be over 40 years of age and not directly related to the lessee i.e. son/daughter.

Tax Anomalies

• The following are a list of the most common tax anomies which applies to certain categories of farmers that our office deals with on a day to day base.
• If a qualifying farmer leases his farm to enable him/her to benefit from the farm retirement scheme or simply leases his land on a long term lease of over five years, provided he is over 40 years of age, the tax exemption of €12,000 per annum for a five year lease, or €15,000 per annum for seven years or more, will not apply if same is leased to a son/daughter.  However, if that farmer leases to a non family member they do qualify.  In my view this is unfair and is discrimination against the family farm.
• Where a qualifying farmer transfers to a qualifying son/daughter and both get the benefit of the farm retirement scheme and agricultural relief. 

In a case example in 2002 the son was killed in road traffic accident.  He died single and intestate under the succession act 1965 the lands automatically went back to his parents.  The father and  mother as a result lost the benefits of the farm retirement scheme as they could not find a suitable transferee and no allowance is made whether a lesser/lessee dies during the period of the lease.  Three years later in 2005 the parents decided after due process and mourning, to transfer the farm over to another son who qualifies for agricultural relief, however, as the parents do not now have the land in their name for Ten Years they are liable for Capital Gains Tax on the difference between the valuation on the child’s death and the present day market value.  Again, no allowances made for a death and in my view this is very unfair and discriminatory against the family farm.

• Farmer A transfers his holding of 150 acres to his daughter Mary, however, he decided not to transfer the main residence, but to leave same to Mary after his wife and his death in a will.  After both of their deaths, the residence will not qualify for agricultural relief, but, if it had been transferred with the farm, it would.  This tax law needs to be seriously looked at, as it may cause financial hardship in having to pay additional Capital Acquisition Tax. 
• Retirement Relief – Farmer B who has attained the age of 55 and decides to dispose of part or all of his holdings is free from Capital Gain Tax where the consideration is less than €500,000 if it is more than this figure there is then margin relief, however, to qualify for this relief he must have owned and farmed his lands for a minimum of ten years.  But if farmer B was renting his lands, he does not qualify for the relief and CGT will apply as normal.  This in my view applies mostly to vulnerable people who are widows/widowers or suffering from ill health and who have no option but to let their land so they get hammered.  The liability for CGT is a deterrent to the transfer of lands to younger persons whose Farming Practices would be more beneficial for the land rather than those of a tenant who must seek as much profit from the land in a short period as he can.

All in all there will always be a future for agricultural in Ireland but at varying levels and land will always be a scare commodity and like all scare commodity will never be cheat.