Finance Bill 2012: Tax Planning

TAX CHANGES WILL INCREASE THE POTENTIAL OF LAND AS AN INVESTMENT

Declan McEvoy A.I.T.I., T.E.P., Senior Tax Consultant, IFAC Accountants

Last week’s Country Property section of the “Journal” stated that anecdotal evidence suggests that cash rich individuals have stood on the fence over the past few years in anticipation that the price of land would fall further but the uncertainty of the euro coupled with the instability of leaving large volumes of money on deposit, has sparked an increasing interest to buy agricultural land in recent months. The Finance Bill published last week adds further to the potential of land as an investment.

FINANCE BILL 2012

The Finance Bill contains Stamp Duty and Capital Tax changes which will make investment in farmland more attractive to farmers and non-farmers alike.

STAMP DUTY

The Finance Bill sets out the proposed legal wording to give effect to the budget announcement that from midnight on 6th December 2011, the Stamp Duty rate for commercial property transfers, including farmland, has been reduced from 6% to a flat 2% rate. This applies to farmers and non-farmers alike.

Impact on cost of land purchase

Land purchases in excess of €80,000 will see the stamp duty costs reduced from 6% to 2% e.g. a saving of €4,000 on each €100,000 of land purchase cost.

Impact on Farmers over 35 years of age

Farmers under 35 years of age and eligible for the Young Trained Farmer Stamp Duty Exemption pay no stamp duty on land transfers or land purchases while those over 35 were liable for the 6% rate. As the stamp duty rate for the over 35 year old is now reduced to 2% this will enable the over 35 year old to enter the market with less of a disadvantage relative to the Young Trained Farmer.

CAPITAL GAINS TAX

7 Year Capital Gains Tax Holiday will apply to farmland

It was originally thought that this tax incentive would only apply to houses and property which were purchased during the Celtic Tiger era and possibly only apply to NAMA properties. The Finance Bill states that this relief will apply to land or buildings (situated in an EEA State) which

• Is acquired on or after 7th December 2011 and up to and including 31st December 2013, and
• Continues in the same ownership for a period of at least 7 years from the date the land or buildings were acquired.

Example
Sean, a non-farmer, purchased 100 acres of land for €800,000 on 1st January 2012. Assume he sells the land for €1,200,000 on the 1st January 2019 i.e. a capital profit of €400,000 and the applicable capital gains tax rate is 30%.

	CAPITAL GAINS TAX PAYABLE
	With the new Relief	Without the Relief
Sale Price	1,200,000	1,200,000
Purchase Cost	800,000	800,000
Capital Profit	400,000	400,000
Tax @ 30%	Exempt	120,000
Cash Profit after tax	400,000	280,000

But for this relief the capital gains tax bill would be €400,000 x 30% = €120,000. The relief ensures no capital gains tax is payable.

What if Sean held the land for 10 years?

If Sean held the land for 10 years from 1st January 2012 to 1st January 2022 and assuming he had a similar capital gain of €400,000 the part exempted would be the 7 years tax free period in proportion to the total period of ownership i.e. 7/10ths x €400,000 = €280,000.

Assuming a similar capital gains tax rate as today i.e. 30%, the tax bill would be €36,000 on a gain of €400,000 i.e. an effective 9% rate compared with 30% if no relief available.

GIFT & INHERITANCE TAXES

The amount which parents may transfer to a child tax-free has been reduced from €332, 084 to €250,000 with effect from 6th December 2011. This reduction will make existing tax reliefs even more valuable e.g. Agricultural Relief.

What is Agricultural Relief?

Agricultural relief is a tax relief which allows an individual, provided they meet certain conditions, to reduce the taxable value of agricultural property passing in gifts and inheritances by 90%.

In the example above, Sean a non-farmer, could transfer the land worth €1.2m to his non-farming son at a tax value of €120,000 which is covered by the parent to son tax-free threshold i.e. €250,000. The tax saving is €285,000 provided Sean’s son can satisfy the qualifying conditions.

Conclusion

The Stamp Duty reduction and the 7 year Capital Gains Tax holiday (both available to farmers and non-farmers), the reduction in the parent to child gift tax exempt amount on gifts and inheritances the availability of Agricultural Relief to non-farmers and the uncertainty of the euro coupled with the reduced confidence in leaving large volumes of money on deposit should increase the potential of farmland as an investment.