Defra is currently consulting on its plans to give farmers the option of taking their remaining Basic Payment Scheme (BPS) subsidies as a lump sum in 2022 to help support and encourage retirement within the sector. In return, their BPS entitlements would be cancelled, preventing them from claiming BPS for the remainder of the agricultural transition period.

The consultation acknowledges that the tax treatment of the lump sum is an important factor in farmers’ decision making and Defra is continuing to discuss this with HMRC. Although, in reality, capital taxation implications relating to any owned property will have a more significant influence on whether or not farmers choose to participate in the scheme.

In order to qualify for the scheme, owner occupiers have to rent out (on a minimum five-year Farm Business Tenancy), sell or gift their land. Tenants will have to surrender their tenancies or arrange for a succession tenancy if allowable under an Agricultural Holdings Act 1986 tenancy.

This could lead to a substantial tax liability which will require thorough consideration before potential applicants apply.

Capital gains tax

Today’s higher land values mean that the sale or gifting of land could trigger a capital gains tax bill at 20 per cent (or 10 per cent for lower rate tax payers) of the chargeable gain. In a similar way, if a tenant receives a surrender payment from their landlord for a tenancy, that could be treated as a disposal and also result in tax being due.

Farmers may be able to benefit from Business Asset Disposal Relief, which reduces the capital gains tax liability to 10 per cent when the recipient is closing their business. However, there are time limits and a cap of £1 million in a lifetime.

If a farmer chooses to gift their business assets, to their children for example, Holdover Relief may be an option, delaying the capital gains tax until the recipient sells the assets.

Inheritance tax

Agricultural property and property held for a business purpose is usually exempt from inheritance tax. If farmers opt for the Lump Sum Exit Scheme and dispose of assets that would have benefited from Business Property Relief or Agricultural Property Relief, retiring farmers then risk their estate paying 40 per cent inheritance tax on the cash they hold. They could reinvest any proceeds into other exempt assets or gift assets in advance of death, but both of these need a clear strategy and advice.

If an owner occupier instead decides to grant an FBT, with a minimum five-year term, the owner may still be eligible for Agricultural Property Relief on death. While this provides some relief, it is unlikely to cover the full value of the farmhouse or land and any buildings that have development potential.

How it all adds up

Given the tax implications to qualify for the scheme, it is perhaps more appealing to tenant farmers who are likely to have less capital. Owner occupiers who are seeking to retire in the near future may be more inclined to consider contract farming or share farming arrangements instead of the Lump Sum Exit Scheme as mechanisms that will allow them to retain the tax reliefs and continue to generate an income stream from their farm.

However, in light of the significant government deficit resulting from Covid-19, speculation is building surrounding tax reforms. This uncertainty does not aid decision making but those concerned about the changes that are being mooted, including removal of reliefs in their entirety, may decide to act now while the rates and reliefs are known and use the sum from the scheme as a bonus.

Given the Government’s ambition to encourage farmers to retire to allow room for new entrants, its proposals do not seem enticing enough to exit the industry. Moreover, there is no guarantee that newly available land will be accessible to new entrants.

One way policy makers could try to encourage more uptake of the scheme would be to adapt a successful Irish model of income tax relief for letting land on long-term tenancies. Their policy of offering increasing tax breaks, with the biggest tax free allowance given to those offering the longest tenancies, saw the area of let land in Ireland increase from 2 per cent of the agricultural area in 2011 to 7 per cent by 2017.

While farmers will not be required to have completed the transfer of their land or tenancy surrender by the time they apply for the scheme in 2022, potential applicants will need to take a holistic view as to the opportunity, or potential threat, this scheme offers them in terms of tax liability.

Further information

Contact Savills Rural