Lump sum exit claims : Tax, timing and paperwork tips

Defra has confirmed that more than 2,700 farmers initially applied to the Lump Sum Exit Scheme (LSES) – the application period for which closed on 30 September.

The scheme was introduced earlier this year to incentivise people to retire from farming or exit the sector, potentially freeing up land for the next generation.

In return for stepping away from farming, applicants will be paid a lump sum relating to the average Basic Payment Scheme (BPS) payment received in 2019 to 2021 multiplied by 2.35, but with a total payment cap of just under £100,000. 

See also: Farmers’ Lump Sum Exit Scheme applications revealed

Farmers are required to fill out an entitlements and evidence form before they will be paid the lump sum. The final deadline for this to be submitted is 31 May 2024.

Consultants suggest that before submitting the claim form that triggers the payment, applicants should take advice to avoid some potential pitfalls.

“The claim form has to be signed by an agricultural valuer or solicitor anyway, so it is just worth making sure that you talk it through with them to ensure that you are making the right decisions,” says Nicola Clayton-Bailey, a rural surveyor and partner with Bletsoes.

The Rural Payments Agency (RPA) has said that payments will begin in November 2022, so applicants who have already surrendered their land can get on with gathering the evidence required for the claim form to put themselves at the front of the queue, says Mrs Clayton-Bailey.

Her experience to date is that the RPA is dealing promptly with forms.

The evidence can include documents such as the transfer deed (TR1 or TP1), which is lodged with the Land Registry, or potentially a surrender deed or expired notice to quit for tenants who are returning land to their landlord.

“A copy of these will need to be sent with the claim form and I would always advise they are sent signed delivery, given they are formal documents,” she says.

A practical point for anyone in the process of transferring out their land and entitlements, where they have already claimed BPS in 2022, is they need to make sure the land stays eligible for BPS and meets cross-compliance rules for the whole year.

“For example, if surrendering land on 1 November, then you would want an agreement with the landlord, or whoever may be in occupation, to make sure that the land is cross-compliant until 31 December,” she says.

Similarly, where there is a Countryside Stewardship scheme in place, then the outgoing farmer will want to transfer their obligation to the incoming farmer, otherwise they may need to pay money back.

Good documentation

George Dunn, chief executive of the Tenant Farmers Association, agrees there are complications in situations where tenants are looking to pass land back before the end of the calendar year to ensure cross-compliance or stewardship requirements are met.

But he adds: “While these are complications, they are matters that are routinely sorted between landlords and tenants in the normal course of events.

“However, good advice and good documentation is necessary to ensure that there is both clarity as to responsibilities and that there are appropriate indemnities in place for any breaches.”

Rob Hitch of accountants Dodd & Co says the RPA had previously confirmed that the LSES will be paid as a capital receipt and as such will be subject to capital gains tax, which is currently set at 20%.

However, where a business is ceasing business asset disposal relief (BADR) should apply, bringing the rate down to 10%.

Farmers need to be liaising with their accountants to make sure they meet the qualifying conditions for BADR, including those around the timing of the disposal of assets, he says.

The tax liability arising from the lump sum is relatively straightforward to deal with. What farmers really need to consider is the income or corporation tax liability that could come if selling off machinery and livestock, he adds.

“If you have breeding livestock held on a herd or flock basis, then any uplift over the costs in the accounts should be tax-free,” he says.

“But if you have trading basis animals, so that might be youngstock, fattening cattle or store lambs, then all of these will give rise to profit when they are sold on. That gives rise to a bigger profit in the year you cease.

“At the same time, if people are selling machinery, most farms have a tax written down value of machinery of zero because they have been claiming annual investment allowances for the past 15 years.

“So consequently, if they were to sell all their machinery, they would pay an income tax on that.”

Mr Hitch says it is not possible to average profits in the final period of operation, so people need to plan ahead.

For example, it might be worth selling the machinery this year so any profits can be averaged across previous years, but not retire until the next tax period.

“Farmers may think they are getting £100,000 off the government that might be taxed at 10-20%.

“But if you get £100,000 for machinery and £100,000 for stock, then suddenly you can get a very big profit with a lot of it taxed at 40%, if you are not careful – not to mention the possibility of losing some or all of your personal allowance where total income exceeds £100,000.”

Deadline reminders

Ben Taylor, associate at lawyers Roythornes, says anyone in doubt about being able to fulfil the eligibility conditions for the LSES by 31 May 2024 should let the RPA know in plenty of time, and provide evidence, so that they can seek an agreed extension to the deadline.

If unsure that they will meet the eligibility conditions for a lump sum, also make a BPS application in 2023, as on current guidance this is a condition for receiving de-linked payments from 2024 onwards, he says.

If requested by the RPA to provide further information in support of a claim, it will also be important to supply the information by the date specified.

Sean McCann, chartered financial planner at NFU Mutual, says farmers taking the lump sum should also take advice from a financial planning perspective.

“Those ceasing to take an income from the farm may need to access their pensions or invest the lump-sum payment to provide an independent source of income.

“There is a wide range of options, so it’s important to take advice based on your own circumstances.”

Inheritance tax is likely to be a key consideration for many of those who have taken advantage of the exit scheme, he adds.

“Selling land, renting it out, or surrendering a tenancy can all change inheritance tax liabilities, so farmers may want to take advice on how to mitigate future tax bills.’