RPA Lump Sum Exit Scheme: capital tax treatment and timeline

The RPA have released additional details of the Lump Sum Exit Scheme, which opens shortly for claims, as England transitions to the end of Direct Payments in 2027.

The scheme offers farmers a lump sum payment – in place of the BPS income payments which would have been received from 2022 to 2027 – in exchange for transferring their land and surrendering BPS entitlements. This is intended to facilitate new entrants to farming.

Readers of our last Agricultural Addition will be aware that the Lump Sum Exit Scheme does not offer significantly more money than farmers should otherwise receive through Basic Payment. The Lump Sum Exit Scheme’s attractiveness is primarily to farmers who are motivated to retire soon.

Tax treatment

Importantly, the RPA have now announced that the lump sum will be taxed under the capital gains tax regime (corporation tax for companies) rather than income tax.

Capital gains tax (CGT) treatment will be more attractive for many claimants, because every individual has a CGT annual exemption (currently £12,300 per annum). The CGT annual exemption is often unused and is additional to the income tax personal allowance.

Moreover, the rates of capital gains tax for non residential property are currently 10% and 20% (compared with income tax, which usually charges 20% or 40%; often with national insurance on top, which will be 10.25% or 3.25% by the time the lump sum payments are made).

CGT also offers potential reliefs and elections which may further reduce liabilities.

That said, for those farmers who currently pay little income tax because their profits are low, there will be little opportunity to save tax by taking the Lump Sum Exit Scheme.

Headline requirements

To qualify for the Lump Sum Exit Scheme you must:

• Have claimed (and been eligible for) BPS payment in the 2018 scheme year or earlier; or

• Have inherited land in England or succeeded to an Agricultural Holdings Act (AHA) 1986 tenancy after 15 May 2018.

and you must:

• Transfer away all the agricultural land in England which was at your disposal at 17 May 2021 (except for 5 hectares which can be retained) or plant it to trees under a woodland creation scheme; and

• Surrender your BPS entitlements to RPA ; and

• Transfer away any rights to graze or pannage on common land.

‘Transfer’ can include the sale, gift or letting (on an FBT of at least 5 years) of owned land, or the surrender or assignment of a tenancy (but not to a spouse or someone you are living with as a couple).

Land ‘at your disposal’ was either farmed by you (or a contractor) as owner-occupier or where you were a tenant with an FBT or AHA tenancy. It only applies to agricultural land which would be eligible for BPS.

You do not have to transfer buildings – so you could keep your farmhouse.

Common land rights must be transferred if they are attached to the land you transfer or if they are not attached to land.

Calculation of the payment

Lump sum payment = reference amount (capped at £42,500) x 2.35

Reference amount = (BPS 2019 + BPS 2020 + BPS 2021) / 3 but capped at £42,500

Over-claimed land will be excluded from the BPS amounts for 2019, 2020 and 2021 but penalties, progressive reductions for BPS 2021 and reductions to amounts above €150,000 will be ignored.

If you do not surrender enough entitlements, your payment will be reduced.

If, for example, you claimed BPS 2021 on 20 entitlements, but you only surrender 15 entitlements, you would only be surrendering 75% – and you would only receive 75% of your lump sum.

Timeline

Deadline and action you need to take

From February 2022 Request a forecast statement

February 2022 – Forecast statements begin to be sent to those who have requested them

April 2022 – Applications open

16 May 2022 – BPS 2022 application deadline to avoid late application penalties to your BPS application (if you choose to submit one to protect your position)

30 September – 2022 Applications close

From November 2022 – Payments begin once the scheme rules have been met

31 May 2024 – Latest date you must have complied with the scheme rules

Consequences of claiming

You cannot access further BPS Direct Payments or delinked payments, and cannot apply for some other agricultural schemes, if you claim the lump sum exit payment.

Transferring your land may have adverse consequences for capital gains tax and inheritance tax; you should consider your tax position and that of your business and family in the round before claiming under the scheme.

Conclusion and disclaimer

Please find below an appendix highlighting some further details copied from the RPA’s guidance. The RPA’s guidance is currently accessible from /government/publications/lump-sum-payments-for-farmers-who-leave-or-retire-from-farming-and-delinked-payments.

Please bear in mind that the purpose of this article and appendix is to draw your attention to the availability of the scheme. You must refer to the RPA’s detailed guidance before taking any action.

We are here to help. Please get in touch with us if you would like to discuss tax implications of an application for the lump sum payment.

Appendix – Some further key points from the RPA’s guidance

Partnership and limited companies

Where some partners in a partnership or shareholders in a company wish to retire, but others do not, the lump sum can still be claimed if:

• A partner with more than a 50% interest in profits retires from the partnership; or

• More than one partner with combined interests of at least 50% profit retire; or

• A shareholder with 50% or more equity share capital sells or gifts the shares; or

• Multiple shareholders with combined equity shareholdings of at least 50% dispose of their shares.

The leaving/retiring individuals must transfer their land (if it is held in their name or partly in their name) – but it can be transferred to the continuing parties of the business. If the land is not in the leavers’ names (solely or partly), no transfer is needed.

The BPS entitlements of the business must be surrendered before the lump sum will be paid.

The continuing business can claim no further BPS or delinked payments.

BPS claims by other businesses

Once a lump sum exit payment is received you cannot claim any future BPS or delinked payments.

You can, however, still claim in other businesses – for example Mr A is a sole trader but he is also in Partnership B. He claims the lump sum on his own farming as a sole trader, but Partnership B does not claim and is therefore unaffected and can still claim BPS.

Interaction with other schemes

You cannot enter into schemes under the Sustainable Farming Incentive or some options under Countryside Stewardship and Local Nature Recovery if you have had a lump sum, unless it is first repaid.

You can apply for other schemes like the Future Farming Resilience Fund or Farming Investment Fund.

You should check the terms of your agreements for existing Countryside Stewardship (CS) and Environmental Stewardship (ES) schemes before applying for a lump sum.

The RPA are encouraging the transfer of agreements with the transfer of land, to keep the environmental benefits going.

However, there may be some capital grants or other monies which need to be repaid upon transfer.

You should communicate with the RPA throughout any potential transfer of land subject to existing CS or ES agreements.

Woodland is not considered agricultural land, so land already under any woodland scheme should not need to be transferred.

Similarly, planting of land to woodland under woodland creation schemes is an alternative to transferring the land under the lump sum rules.

BPS 2022

BPS 2022 can be claimed as well as applying for the lump sum exit scheme if you wish to protect your position.

If you then transfer land on which BPS 2022 was claimed, you must make sure contracts are clear about the consequences of breaching the rules of BPS for the rest of the scheme year.

If you claim BPS 2022 and then receive a lump sum, your 2022 BPS will be deducted from the lump received.

Further information

More information about the operation of the Lump Sum Exit Scheme and how to request a forecast can be found on the Government website at /government/publications/lump-sum-payments-for-farmers-who-leave-or-retire-from-farming-and-delinked-payments

Reference must be made to the RPA’s full guidance before making decisions.