Agricultural Relief and Pensions

When we think of farmers we don’t generally think of pensions, but they clearly are of benefit, not only for the usual pension reasons, but also for tax planning reasons. Agricultural Relief is an example of this worth noting.

Agricultural Relief is a relief available to individuals who receive a gift or inheritance of agricultural property. If a person qualifies for Agricultural Relief, they will only pay Capital Acquisitions Tax (“CAT”) on 10% of the value of the agricultural property inherited. One of the main qualifying criteria for this relief is that at least 80% of the value of the person’s assets, after taking the gift or inheritance, is comprised of agricultural property.

The Revenue Commissioners have confirmed that an interest in a pension or pension fund can be ignored by the holder of this asset when calculating whether a beneficiary meets the 80% agricultural assets farmer test.

 

The effect of this is that a person could avail of significant CAT savings if they were to have long term savings in a pension fund, as opposed to holding these savings outside of a pension.

The examples below illustrate the potential CAT savings that could be made if a person has invested some of their assets in a pension, as opposed to holding them personally.

Example 1 – No Pension/ Pension Fund

Non-agricultural Assets                        €200,000

Agricultural Assets Inherited                 €700,000

Percentage of Agricultural Assets                78%

Person will not qualify for Agricultural Relief as less than 80% of their assets after taking inheritance are comprised of agricultural assets. Therefore, the person will be liable to CAT on the entire inheritance, leading to a substantial tax liability as can be seen below.

Agricultural Assets Inherited                  €700,000

CAT @ 30%                                         €210,000

Example 2 – With Pension/ Pension Fund

Non-agricultural Assets                         €150,000

Pension Fund                                       € 50,000

Agricultural Assets Inherited                  €700,000

Percentage of Agricultural Assets                 82%

Person will qualify for Agricultural Relief as in excess of 80% of their assets after taking the inheritance are comprised of agricultural assets. Therefore, the person will be able to avail of agricultural relief, resulting in a very significant tax saving.

Agricultural Assets Inherited                  €700,000

Less Agricultural Relief (90%)                €630,000

Liable to CAT                                       €  70,000

CAT @ 30%                                         €  21,000

As can be seen from the above examples, a person who has invested in a pension fund will pay 90% less CAT than the person who has not, as the pension is used to reduce the value of the person’s non-agricultural assets which results in the “80% test” being satisfied and therefore Agricultural Relief can be claimed on the inheritance.

Routing a person’s long term savings through a pension/ pension fund can therefore result in significant CAT savings, in addition to the benefit of being able to avail of income tax relief and the benefit of the pension asset increasing in value tax free with a tax-free lump sum at retirement. For anybody who has an expectation of receiving a gift or inheritance of agricultural property in the future, a pension should be strongly considered not only as a way to provide an income in retirement, but also as a potential tax planning tool.

Paul Wymes

ITC Consulting