Lump Sum Exit Scheme for retiring farmers
Recently DEFRA announced some preliminary details surrounding the Lump Sum Exit Scheme which is designed to pay retiring farmers a lump sum in exchange for giving up their Basic Payment entitlements and land. There is plenty of information already and more details to come but there were 5 points in particular which are of interest from a tax and business planning point of view.
Taxation of the lump sum
The lump sum will be treated as a capital receipt. This means it will attract a Capital Gains Tax (CGT) Rate of 10% or 20% depending on the recipient’s available income tax basic rate band. Recipients will also be able to offset their CGT annual exemption of £12,300 against the lump sum before calculating the tax, providing this is not used against any other gains.
Transferring agricultural land
In order to receive the lump sum, recipients must transfer their agricultural land or plant it with trees under a woodland creation scheme. Transferring land may result in CGT needing to be paid if the land is sold to a third party. If the land is gifted, the transferrer needs to be sure that they can holdover the gain to the transferee otherwise CGT may be due.
However if the land is not transferred away and the owner continues to hold it on their death, then there is an uplift to probate value and the capital gain is wiped out. So transferring land away now realises a gain which may not have otherwise arisen.
Renting out the land – Inheritance Tax implications
An alternative to transferring ownership of the land is to rent out the land on a Farm Business Tenancy with a minimum term of 5 years. This has implications for Business Property Relief (BPR) from Inheritance Tax. BPR is available against qualifying business assets and is important as it can cover the market value of land, compared to Agricultural Property Relief (APR) which only covers the agricultural value. Renting out the land can turn a trading asset potentially covered by BPR into an investment asset which does not qualify. This is especially important if there is development, or hope, value in the land.
Inheritance Tax implications – the farmhouse
For a farmer who lives in a farmhouse, the fact that they are occupying the farmhouse for the purposes of agriculture is important for the ability to claim APR from Inheritance Tax against the value of the farmhouse. Transferring away the land may mean that they are left with an asset which may have lost a valuable Inheritance Tax relief.
Partnerships and Limited Companies
It is possible for farming businesses to continue after receiving a lump sum, but these need to be partnerships or Limited Companies. The retiring partner(s) or shareholder(s) need to own 50% or more of the business interest before transferring their interests away in their entirety, along with the land held in their own name. The land can be transferred to the remaining partners or shareholders.
More detail is expected soon however the scheme opens for applications in April 2022 so any planning needs to be started now.
