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
