Taxation: Lump Sum Exit Scheme may lead to potential tax liabilities
Research by the University of Exeter has revealed that 18% of farmers have made no financial plans for life after work, whilst over one quarter have not discussed later life plans with anyone. The recent Government proposal to launch a Lump Sum Exit Scheme (the Scheme) to encourage older farmers to retire may well prompt some families to consider their options for succession. However, there are several potential tax liabilities which could arise and these should be considered early in the process, when the financial viability of a plan is assessed.
What is the Lump Sum Exit Scheme and will I have to pay tax on any payment?
The Government has proposed to allow retiring farmers to roll-up five years of Basic Payment Scheme payments into a lump sum exit payment (see Agriculture Act 2020: Will the Lump Sum Scheme provide an exit?). The consultation, open until 11 August 2021, acknowledges that tax treatment of the payment is an important issue, but provides no further detail.
The payment may be taxable as income. This can push taxpayers into a higher tax band or cause them to lose reliefs. As monetary proceeds do not attract reliefs the Scheme can also increase the inheritance tax (IHT) bill. For farmers who hope to pass on part or all of the payment to relatives, the gift may be assessed for IHT should they die within 7 years. Importantly as the Scheme would require farmers to sell, let, gift, surrender or transfer their land, this can create other tax liabilities.
Will I have to pay Capital Gains Tax (CGT)?
If a gain is made on the transfer of farming land or assets, this can give rise to an immediate CGT liability. Reliefs may reduce tax exposure but are not available in all circumstances.
Holdover Relief allows the gain to be ‘held over’ so that the transferee becomes liable for the tax in the event of a subsequent disposal.
It may not be desirable for some, particularly succession gifts, that relatives are exposed to potential tax liabilities. Business Asset Rollover Relief may instead be available to postpone the tax liability provided the proceeds are used to buy new business assets and the business is still trading. This is, however, unlikely to be the intention of many retiring farmers and indeed would be unlikely to fulfil the proposed condition of the Scheme that the recipient must leave the industry.
Business Asset Disposal Relief works differently by reducing the rate of tax payable. It can be available for farmers selling their farming business, who were sole traders or business partners for at least 2 years up to the date of sale and who owned the business in that time. It is therefore important for farmers to consider tax planning well in advance of retiring.
Will I need to pay IHT now on transfers I make?
Certain transfers during one's lifetime, such as to a company, can attract immediate IHT liabilities. This can be avoided as there are exceptions such as outright gifts to children, which are potentially chargeable only if the farmer dies within 7 years. Furthermore, exemptions like Agricultural Property Relief (APR) could apply to enable some or all of the agricultural value of the asset to be passed on free of tax.
To qualify for APR the asset needs to be owned and occupied for the "purposes of agriculture" for a period of time immediately before its transfer. This is also the case in respect of a farmer's main residence. The relief is therefore unlikely to assist retired farmers who are in continued occupation of their farmhouse or cottage, but are no longer carrying on the business of the farm.
Business Relief could cover the value of an asset not covered by APR, although a significant element of private use is likely to bar relief, as may other circumstances, like loss-making farming practices or farming businesses which involve letting buildings for storage or holiday lets.
For these reasons, farmers should consider tax and financial planning well in advance of significant asset disposals or receiving large monetary payments to ensure they can satisfy exemption requirements and minimise their tax exposure.