Reforming Agricultural Relief and Business Relief from CAT

Brendan Burgess

Brendan Burgess

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There is a good discussion of this in the Alan Shatter thread on CAT generally.

Based on the discussion, I have come up with a new proposal which I will send it as a Pre-Budget Submission.

This thread is about reforming Agricultural Relief and Business relief and not about CAT generally.

Some people believe that CAT is fundamentally wrong and should be scrapped. If you hold with this opinion, then it should be scrapped on all inheritances. Feel free to continue the discussion of this issue in the existing thread.

But as CAT is public policy, this thread is specifically about making Agricultural Relief and Business Relief fairer.
 
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How ordinary CAT works

If I inherit an investment property from my mother worth €2,335,000
The first €335,000 will be exempt from CAT
The remaining €2m will be taxed at 33%, so I will pay €660,000.

How Business and Agricultural Relief work at present.

If I inherit a farm or a business worth, €2,335,000, the €2,335,000 is reduced by 90% to €233,500. In other words, I am deemed to have received an inheritance of €233,500 and not €2,335,000.

As this is less than the Group A threshold of €335,000, I will pay no CAT.

If I sell within 6 year, there will be clawback. But if I wait for 6 years and then sell, I will have no CAT liability.

To get Agricultural Relief, you must meet some other criteria e.g. you must be an active farmer.
 
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The rationale behind these Reliefs

It is argued that if someone inherits a farm worth €2,335,000 and had to pay €666,000 CAT immediately, then they would have to sell part or all of the farm and it would be the death of rural Ireland.

Likewise, if the owner of a business had to find €666,000, they might have to close or sell the business leading to unemployment.

So the social benefit of keeping farmers and businesses running outweighs any issues of tax fairness.
 
Criticisms of these Reliefs

There are no limits.
If I inherit a business worth €100m, its value is reduced to €10m for CAT purposes.

I can sell after 6 years so that defeats the rationale for the Reliefs in the first place
There is some merit in the argument that farmers could not afford to pay 33% CAT because of the unique nature of farming and imposing this tax on them, would mean that they would have to leave farming. I accept that, but if they choose to leave farming anyway, then they should pay the CAT.
 
My proposal

Those who inherit farms or businesses would have the following choice

1) Pay CAT as normal.
2) Pay CAT only if they sell the business or farm

So if I inherit a farm worth €2,335,000, I can choose to pay €660,000 immediately as with any other investment.

However, if I never sell the farm, but leave it to my nephew, then I never pay CAT.

If I sell the farm after 10 years for €3,335,000 , then I pay 33% CAT on the sales proceeds, after the Group A exemption.
Sales proceeds €3,335,000
Group A exemption: €335,000
Subject to CAT €3,000,000
CAT payable @33% €990k
 
No farm or business would need to be sold or closed down to pay the CAT so the rationale for the relief has disappeared.

Farmers have the best of both worlds. If they have the money, they can pay the CAT now and be done with it. If their intention is that it remains in the family forever, then no CAT will ever be paid.

If someone gets a substantial inheritance and converts it to cash, then they pay CAT on it as with any other investment.
 
Brendan Burgess said:
Farmers have the best of both worlds. If they have the money, they can pay the CAT now and be done with it. If their intention is that it remains in the family forever, then no CAT will ever be paid.
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Do that and by 30-40 years time you'll have created a new ascendancy of 18th century-style landlords who collectively own vast tracts of farmland but whose knowledge of farming is confined to having their agents collect rents from actual productive farmers.

Meanwhile, the actual productive farmers will be forever stymied by the fact that they cannot increase their holdings as market prices for farmland are engorged by the huge taxes crystallising upon sale.
 
T McGibney said:
Do that and in 40 years time you'll have created a new ascendancy of 18th century-style landlords who collectively own vast tracts of farmland but whose knowledge of farming is confined to having their agents collect rents of actual productive farmers.
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Sorry Tommy

I don't understand how my proposal results in this outcome. Could you explain.



Brendan
 
You have made a prediction.
As far as I can see there is absolutely no basis to your prediction.
But I am quite willing to change my mind if you show how you reached that conclusion.
 
The Government had been planning to limit the value of a business qualifying for Retirement Relief to €10m. That is being scapped.

Retirement Relief is a cousin of Business Property Relief which relieves the owner from CGT on a transfer. It typically interacts with CAT reliefs.
 
Brendan Burgess said:
You have made a prediction.
As far as I can see there is absolutely no basis to your prediction.
But I am quite willing to change my mind if you show how you reached that conclusion.
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You're in denial Brendan. You clearly know precious little about economics, the specific economics of agriculture and land, or the social history of rural Ireland if you think that imposing cumulatively disproportionate transaction taxes on land sales will not lead to grossly dysfunctional outcomes.
 
Brendan Burgess said:
My proposal

Those who inherit farms or businesses would have the following choice

1) Pay CAT as normal.
2) Pay CAT only if they sell the business or farm

So if I inherit a farm worth €2,335,000, I can choose to pay €660,000 immediately as with any other investment.

However, if I never sell the farm, but leave it to my nephew, then I never pay CAT.

If I sell the farm after 10 years for €3,335,000 , then I pay 33% CAT on the sales proceeds, after the Group A exemption.
Sales proceeds €3,335,000
Group A exemption: €335,000
Subject to CAT €3,000,000
CAT payable @33% €990k
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Would there be interest on the CAT bill if it's not paid immediately?

If it's not paid in one generation and the next generation inherit and farm/operate the business what is the new CAT bill attached on farm/business? What happens after 3/4 generations?

Would it encourage a family to keep control of the farm land indefinitely as each subsequent generation owns a smaller and smaller % of the asset but can still rent it out/farm it for income but would receive a generationally decreasing % of the total value if sold?
How do you think this would impact farm mobility?

What if a farmer/business wishes to modernise/expand etc how will this impact the availability of secured capital loans?

What do you think the impact of this would be on the price of farmland/small businesses in Ireland and how would you see that impacting the overall economy?

Incentives matter and Ireland is already over reliant on large multinationals with a comparatively weaker SME sector. Do you think this would act as an incentive to SMEs and encourage more people to take on entrepreneurial risk to set them up?
 
Hi Bill

Good probing questions.

Would there be interest on the CAT bill if it's not paid immediately?
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The choice is to pay the CAT immediately or pay it if the property or business is sold. The CAT would be paid on the sales value not on the probate value. No interest would be paid.

If it's not paid in one generation and the next generation inherit and farm/operate the business what is the new CAT bill attached on farm/business? What happens after 3/4 generations?
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No CAT is paid until it is sold. If it's passed from generation to generation for 400 years, no CAT is paid for 400 years.
That is the whole point of it.

Compare that with the investment property. If my father left me a property worth €2,335,000, I paid €660k CAT on it.
If I leave it to my son in 10 years when it's worth €3,335,000, he will pay €990k on it.
My proposal would result in the impact of CAT on businesses and farms still being much lower than the impact on other assets.


Would it encourage a family to keep control of the farm land indefinitely as each subsequent generation owns a smaller and smaller % of the asset but can still rent it out/farm it for income but would receive a generationally decreasing % of the total value if sold?
How do you think this would impact farm mobility?
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They don't own a smaller % of the asset. They own 100% of the asset. But when and if they sell it, they must pay a constant percentage - i.e. 33% - in CAT.

If they hold it indefinitely, they pay no CAT. This only impacts those who sell an inherited farm or business. They pay no CAT otherwise.


What if a farmer/business wishes to modernise/expand etc how will this impact the availability of secured capital loans?
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No problem. Instead of the farm being worth €2,335,000, it would be worth €1.7m ( €2.3m - €660k CAT)


What do you think the impact of this would be on the price of farmland/small businesses in Ireland and how would you see that impacting the overall economy?
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These are difficult to predict. But I would imagine that the impact would be relatively minor as such farms and businesses don't change hands very often

Incentives matter and Ireland is already over reliant on large multinationals with a comparatively weaker SME sector. Do you think this would act as an incentive to SMEs and encourage more people to take on entrepreneurial risk to set them up?
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I set up a recruitment agency in 1987. My objective was to make a good living from it, which I did. I did not think "Well if I set up a great business and then leave it to my children, they will have to pay 33% CAT, so I won't set up a business and will continue in a PAYE job."

The importance of tax incentives to set up businesses is vastly overrated. They are important in attracting foreign multinationals to set up in Ireland, but they are just not a factor in "people going out on their own". The perceived Income Tax advantages of being self-employed are more immediate and more persuasive.
 
So if I understand the proposal, as long as the land is inherited and never sold, there is no CAT liability. Once it is sold, the person who sells it runs the risk of a CAT liability occuring?

If that is the case, it sounds logical.

You would need to consider the impact on some edge cases, for example where there are multiple beneficiaries or inheirtors and the land is sold as part of managing the estate after death. I was executor where 20+ beneficiaries inherited a farm and the only logical way to deal with it was to sell it. Would they have a liability?

Also what about partial sales/transfers, transferring of a site to a child who builds a house and subsequently sells it perhaps 10 years on. ? Or perhaps someone inherits the farm but has their own house and sells the farmhouse and retains the land? Or the land is rezoned, farmer builds houses on it and then sells the houses?

As I said, logical but perhaps needs a little more thought.
 
thedaddyman said:
I was executor where 20+ beneficiaries inherited a farm and the only logical way to deal with it was to sell it. Would they have a liability?
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Yes, as with any normal inheritance.

thedaddyman said:
Also what about partial sales/transfers, transferring of a site to a child who builds a house and subsequently sells it perhaps 10 years on. ?
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The transfer of a site would be a sale and CAT would be due on its value.
thedaddyman said:
Or the land is rezoned, farmer builds houses on it and then sells the houses?
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They would pay CAT on the rezoned value of the land.
thedaddyman said:
As I said, logical but perhaps needs a little more thought.
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Thanks. I have just set out the broad principle and it can be adapted.
 
I don't think that the proposal is practical as an open-ended thing like you are proposing Brendan. With the best will in the world, once you go more than 15 or 20 years after the event it could become very difficult from a record keeping point of view to retain the knowledge of the original transaction and value etc., especially once the property concerned has changed hands more than once. That would be a nightmare to administer, for all concerned.

Also, if I'm understanding correctly you are talking about imposing CAT based on a future value (at time of ultimate sale) rather than the value at the "valuation date" as is the fundamental of CAT. This doesn't really make sense to me, as that would be taxing the gain during the period of ownership - but we already have a capital gains tax for that purpose. Depending on CGT rues / base cost / rate, you could be talking about taxing a future sale at 60%+.

It is very generous that the reliefs as currently formulated allow for a sale after 6 years without any clawback. I think a relatively simple fix would be to pick a longer clawback period with the clawback tapering off over that period. So, say for example there's a full clawback on a disposal within 5 years, and then it tapers off by 20% over each of the following 5 years (or 10% over each of the following ten years), so you have to hold for say 10 or 15 years to get the full benefit of the relief.

The longer clawback holding period might disincentivise a certain practice that I am aware of, whereby the wealthy acquire agri land for their kids (minor or young adult) at a time when the kids can meet the other requirements for relief (i.e. the 80% agricultural assets test), and obtain the benefit of the 90% relief. The land is then let to someone who farms it (another quirk of the relief is that you do not need to be a farmer to qualify for the relief, as long as you let the land to someone who does farm it), thus generating an income stream for the child, and after the 6 years has elapsed they can dispose of the land at their convenience and use that capital for whatever form of investment they like, having suffered little or no tax on the transaction. This is not people from agricultural backgrounds, using the relief to pass their family farm between generations, and if anything, they bid up the price of land. On the flip side, a longer holding period will have very little impact on the bona fide family farm situation.
 
torblednam said:
On the flip side, a longer holding period will have very little impact on the bona fide family farm situation.
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You think? I know of someone who in 2018 inherited a farm the guts of an hour's drive from where they live and it was only when the 6 year holding period ended this year that they could afford to consider its sale and replacement by purchasing another land holding in a location more convenient to them. They found the long drives to and from the inherited farm a total pain as they needed to tend to livestock there on a daily basis and sometimes more than once daily.
 
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