Taxation of the Farmers’ lump sum exit scheme – the devil in the detail

Following the consultation on the proposed exit scheme, and the more detailed announcement on 8^th February, we now know that under the rules applying in England, a claimant will need to have:

• claimed BPS payments in the 2018 or earlier scheme years or inherited agricultural land or an Agricultural Holdings Act tenancy after 15 May 2018
• Transferred agricultural land or a tenancy (apart from up to 5 hectares and non-agricultural land and buildings, which for this purpose will include the farmhouse) or planted it with trees under a woodland creation scheme by 31^st May 2024 and surrendered all BPS entitlements.
• The lump sum payment will represent 235% of the “reference amount” which is the average BPS payment for the three years to 2021 (i.e., before the phased reductions began) and will be capped at just under £100,000.
• The huge uncertainty regarding tax, which has bedevilled the scheme since inception has largely been resolved. It is confirmed that legislation will be passed to ensure that any lump sum payment will fall within the capital gains tax (CGT) legislation and “The existing capital gains reliefs will be available where the qualifying criteria is met”. This treatment will also apply to “interim payments “such as the 2022 and 2023 BPS amounts referred to above. In contrast, the future delinked payments “will continue to be taxed in line with ongoing BPS payments and be income in nature.”

One of the major changes in the February announcement was that a partnership or limited company can apply for a lump sum payment if one or more partners or shareholders with a combined interest in the profits of 50% or more leaves the business and disposes of their agricultural land, either externally or to other partners. All the business BPS entitlements must be surrendered (i.e. not just the proportion attributable to the retiree/s and no further BPS claim can be made by the continuing business.

At this point one needs to consider whether any devils will indeed be lurking in the detail. If the tax legislation merely confirms that the lump sums will be subject to CGT then some aspects will be relatively simple. If the BPS entitlements were actually purchased, there will be a base cost, any existing CGT losses can be utilised, and since the disposal could arise as late as 2024/25, there may be time to crystallise any latent capital losses elsewhere. It will also be worth checking whether the entitlements (either for BPS or its predecessors’ schemes) have at any stage been inherited: since the entitlements have no cost and are eligible for Inheritance Tax Business Property Relief they do not generally appear on a balance sheet and are therefore often overlooked as part of the probate process. In fact, they should have been revalued on death (typically at £100-200/Ha) and will therefore have a CGT base cost.

Complexity will arise when one looks at the lump sum claimant. For an individual the position should be straightforward: there will be a CGT disposal on the cessation of the business and provided that there are no other disposals in the year, the annual allowance will be available, and any gain should be eligible for Business Asset Disposal Relief (BADR). Given that the retirement process may involve transfer of land and surrender of entitlements in a short timeframe, care will need to be taken to ensure that the BADR is not lost and that the use of annual allowances is maximised, but with two full tax years at the retiree’s disposal, this should be feasible.

For the more common vehicle of the farming partnership, the position is more complicated. In addition to the issues identified above, there is also the question of who is making the disposal of the entitlements which are, in all probability, a partnership asset. The partnership agreement may give clarity on this point, but if not, the assumption will be that the lump sum proceeds would be attributed across the partnership in the profit-sharing ratio. This may be advantageous in that multiple annual allowances may be available, but it will also mean that the potential benefit of BADR is reduced. Alternatively, the legislation may be drafted such that the payment is deemed to belong exclusively to the retiree, but since he or she will need to procure the surrender of the partnership entitlements, an internal transfer will need to take place to compensate the ongoing partners for their share of the surrendered assets so there will still be CGT consequences for all the partners. There would be a strong argument for making amendments to the partnership agreement prior to the surrender to facilitate this process.

These arrangements may not be contentious within an amicable partnership (and given that the relief involves moving up to £100,000 from an income tax regime to a CGT regime and enabling succession to the next generation there is no reason why they should not be amicable). However, not all partnerships run entirely smoothly all the time, and since there will inevitably be winners and losers, it will probably be advantageous to begin looking at the position sooner rather than later.

Finally, there is the position of the corporate farming business. This should be the most straightforward, since the entitlements will be owned by the company, there is no annual allowance and the corporation tax rates charged on income and capital are the same, so the only advantage to the company will be one of cashflow or possibly the opportunity to reduce the tax charge by way of claiming existing CGT losses or entitlement base costs. Complexity may arise if the legislation is drafted such that the payment is personal to the retiree but the conditions would require a transfer of value from the company to the director/shareholder, such as the surrender of company entitlements. Given the lack of significant financial advantage and the relatively small proportion of farming companies this should not be a major issue but no doubt there will be a few cases to stretch the mind of practitioners in future.

According to agricultural partner Andrew Perrott “these new announcements on tax and partnership retirements will make the outgoers scheme far more interesting. Up to now it has received a fairly cool response, and it is still a small amount in the context of the assets tied up in a farming business. However, the tax position is more complex than it initially looks. Companies are unlikely to see much benefit and within the popular partnership business vehicle, care will need to be taken that personal friction is avoided and tax benefits optimised. This may take some time, and whilst we do not yet have enough detail on the tax clauses, it is worth opening discussions now to establish what needs to be achieved before the claims are made.”

Full details covering areas such as the interaction with stewardship and woodland schemes, inheritances, mergers and other business changes are available at https://www.gov.uk/government/...

To discuss this further, please contact Andrew.