Tax implications of selling forestry land or leaving to children
Your tax and inheritance questions answered.
Crowe tax partner answers an Irish Independent reader’s question on inheritance and tax. Article published on 3 February 2020.
Question: I have a large forestry plantation in Ireland - which is 10 years old. I am in my 80s. Should I sell this plantation in a few years' time or leave it to my son and daughter in my will? Which would be the most tax-efficient option for them? As they are not farmers, I fear they may not be able to manage thinnings and clearfelling, or the sale of the plantation. Tom, Wicklow
Answer: As I'm sure you are aware, profits from the occupation of Irish woodlands, managed on a commercial basis, are exempt from income tax – though PRSI and the Universal Social Charge (USC) still apply. As such, the forestry investment that you hold is very valuable and one of the few remaining tax-efficient investments available.
A disposal during your lifetime of this land would give rise to capital gains tax (CGT). However, profits from the sale of standing timber should be exempt. Only the increase in the value of the land is assessed for CGT purposes – at a rate of 33%. This tax liability could be avoided if you were to leave the land to your children in your will, as CGT does not arise on death. Upon leaving the land to your children, they will be subject to capital acquisitions tax (CAT) at 33% on the value of the woodland they inherit. Each child can receive €335,000 in inheritances and gifts from their parents over their lifetime before being subject to CAT.
Your children may be eligible for agricultural relief, which reduces the taxable value of the woodland by 90%, if they qualify as a farmer.
To qualify as a farmer, 80% of each child's assets must be in agriculture and forestry on the valuation date.
Each child must also be considered an 'active farmer', whereby they either farm the woodland on a commercial basis or lease the woodland to someone who farms it on a commercial basis.
There is a clawback of the relief where the beneficiaries cease to be farmers within six years of the inheritance.
It is worth noting that trees growing on the land qualify for the agricultural relief regardless of whether your children qualify as farmers or not.
Where your children do not meet the 80% farmer test for agricultural relief, they may qualify for business relief.
Business relief also allows for a 90% reduction in the market value of the woodland when arriving at the taxable value of the inheritance.
In conclusion, while you may have concerns regarding your children's ability to farm the land, if they were eligible for agricultural relief, the tax liability associated with leaving them the woodland in your will, as opposed to leaving them an equivalent cash sum, would be significantly lower. For example, woodlands valued at €1m would be reduced to €100,000 for inheritance tax purposes. This means that you could save up to €297,000 in tax by leaving woodlands valued at €1m to your children - as opposed to leaving them an equivalent cash sum of €1m.
Assuming that your children are not qualified farmers, they could arrange for the land to be let to a qualified farmer to ensure they are eligible for the relief.
This may also alleviate any concerns you have regarding their ability to manage the woodlands.
Question: I have a large forestry plantation in Ireland - which is 10 years old. I am in my 80s. Should I sell this plantation in a few years' time or leave it to my son and daughter in my will? Which would be the most tax-efficient option for them? As they are not farmers, I fear they may not be able to manage thinnings and clearfelling, or the sale of the plantation. Tom, Wicklow
Answer: As I'm sure you are aware, profits from the occupation of Irish woodlands, managed on a commercial basis, are exempt from income tax – though PRSI and the Universal Social Charge (USC) still apply. As such, the forestry investment that you hold is very valuable and one of the few remaining tax-efficient investments available.
A disposal during your lifetime of this land would give rise to capital gains tax (CGT). However, profits from the sale of standing timber should be exempt. Only the increase in the value of the land is assessed for CGT purposes – at a rate of 33%. This tax liability could be avoided if you were to leave the land to your children in your will, as CGT does not arise on death. Upon leaving the land to your children, they will be subject to capital acquisitions tax (CAT) at 33% on the value of the woodland they inherit. Each child can receive €335,000 in inheritances and gifts from their parents over their lifetime before being subject to CAT.
Your children may be eligible for agricultural relief, which reduces the taxable value of the woodland by 90%, if they qualify as a farmer.
To qualify as a farmer, 80% of each child's assets must be in agriculture and forestry on the valuation date.
Each child must also be considered an 'active farmer', whereby they either farm the woodland on a commercial basis or lease the woodland to someone who farms it on a commercial basis.
There is a clawback of the relief where the beneficiaries cease to be farmers within six years of the inheritance.
It is worth noting that trees growing on the land qualify for the agricultural relief regardless of whether your children qualify as farmers or not.
Where your children do not meet the 80% farmer test for agricultural relief, they may qualify for business relief.
Business relief also allows for a 90% reduction in the market value of the woodland when arriving at the taxable value of the inheritance.
In conclusion, while you may have concerns regarding your children's ability to farm the land, if they were eligible for agricultural relief, the tax liability associated with leaving them the woodland in your will, as opposed to leaving them an equivalent cash sum, would be significantly lower. For example, woodlands valued at €1m would be reduced to €100,000 for inheritance tax purposes. This means that you could save up to €297,000 in tax by leaving woodlands valued at €1m to your children - as opposed to leaving them an equivalent cash sum of €1m.
Assuming that your children are not qualified farmers, they could arrange for the land to be let to a qualified farmer to ensure they are eligible for the relief.
This may also alleviate any concerns you have regarding their ability to manage the woodlands.
