In the next three to five years, eight per cent of farmers expect to retire, hand over their business to the next generation or exit agriculture for other reasons. Overall, 64 per cent of respondents to Defra’s October 2021 ‘farmer opinion tracker survey’ said that they would need to make changes to their farm business during this period.
So as intended, the agricultural transition is shaking up the industry, but it is difficult to know whether age, the withdrawal of direct payments and a move towards more complex environmentally focused income streams, or the availability of a dedicated lump sum is the biggest factor in encouraging exits.
To help those who wish to hand over their business to the next generation or leave the industry completely, the lump sum exit scheme is available this year. It will provide a tax efficient lump sum payment of up to £100,000 in exchange for farmers selling, letting or indeed transferring their land to the next generation through gift or an agreed tenancy succession by 31 May 2024.
The eligibility conditions are summarised in this briefing note. Complying with the scheme’s requirements will be more complex for those with a combination of owned and rented land, however; in acknowledgement of this, farmers have two years to work through the process.
Due to the payment cap, the scheme is most attractive to small and medium size farms of up to 450 lowland acres or up to 1,640 acres of moorland. Our calculations suggest over 85 per cent of Basic Payment Scheme (BPS) recipients will be unaffected by the cap.
In isolation a payment of up to £100,000 will not fund a retirement, but it could help unlock retirement plans when combined with other income such as from a farm stock or machinery dispersal sale. Tenants may also be able to negotiate a surrender payment with their landlord, and owner occupiers could sell land to generate capital.
Direct payments such as the Basic Payment Scheme will be decoupled from the requirement to occupy land in 2024. This could provide an alternative way to cease farming and receive the annual direct payments that are due each year up until their final year of 2027.
However, the lump sum exit scheme has a major benefit that this approach does not. Defra has successfully secured confirmation from the Treasury that the lump sum payments will be considered to be a capital receipt rather than income. This opens up the possibility of including the payment in a Business Assets Disposal Relief claim that would allow up to £1,000,000 of gains from the disposal of the business to be taxed at 10 per cent, rather than income tax of 20-45 per cent being charged on the lump sum payment.
The lump sum exit scheme application window opens in April and for anyone considering leaving the agricultural industry it is worth giving it some serious thought. At the same time, it remains essential to give careful consideration to the inheritance tax implications of any changes in land occupation or ownership.
Further information
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