As readers will be aware, the lump sum exit scheme, originally suggested in the September 2018 response to the Health and Harmony consultation, has slowly been taking shape over the last 4 years. The latest consultation came to an end in August and the results, running to some 45 pages, were published on 8 February 2022. The full document is available here and applies in England only.

654 responses were received, covering both the general concept of whether the scheme would be attractive as drafted (less than 1/6 thought that it would) together with questions on eligibility, conditions, the position of tenants, and the detailed calculation of the lump sum. The consultation also covered the delinked payments which will be made to those who choose not to take the lump sum, and the impact of the scheme on the industry (where only about 1/3 of respondents saw it being helpful in encouraging new entrants).

The consultation response from government took on board some of the concerns expressed, confirming that claimants 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. A claimant will need to sell, gift or let his or her land on a 5-year FBT, or surrender or pass on an AHA tenancy by 31 May 2024, at which point all BPS entitlements will be cancelled. Alternatively, the land can be put into a qualifying woodland creation scheme (notwithstanding that this will reduce the land available for new entrants). Recognising that parting with the farmhouse may be something of a disincentive, retirees can retain buildings (including the farmhouse) and up to 5 Ha of agricultural land.

It is confirmed that the lump sum will be based on a ‘reference period’ which is the average BPS payment for the three years to 2021, and that it will be capped at £100,000. The retiree can claim BPS up until the 2024 payment year, but any BPS payment received for 2023 or 2024 will be deducted from the lump sum (and for tax purposes, treated as part of that lump sum).

The explanatory guidance is available here and goes on to clarify further important areas which had not hitherto been fully addressed:

• A partnership or limited company can apply for a lump sum payment if one or more partner or shareholder with an interest in the profits of 50% or more leaves the business and disposes of their agricultural land, either externally or to other partners. The same treatment will apply where more than one partner or shareholder leaves and in aggregate meet the 50% test. 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. The explanatory pages are contradictory in this point, stating on page 6 that “you cannot transfer the land to a partner or shareholder in the business”, but on page 8 “The partners or shareholders who are leaving can transfer the land to the remining members of the business”. The point requires clarification but since the second reference is reinforced by an illustration, it seems that the first rule will only apply where the retiree has less than 50% of the profit share.
• There are some complex provisions covering the interaction with existing stewardship schemes, business mergers and expansion/contraction and partial lump sums where the BPS entitlements are insufficient
• For ongoing businesses, it is confirmed that the post 2024 delinked payments will be based on the average BPS payments for the three years to 2022 (a different period to the lump sum calculation) and will be receivable through until 2027 even if the farm changes size or indeed ceases to trade altogether
• It gives some (but not complete) clarity on the tax treatment of both the lump sum and the delinked payments which continuing businesses will apply after 2024: as regards the lump sum “The existing capital gains reliefs will be available where the qualifying criteria are met” and the delinked payments which “will continue to be taxed in line with ongoing BPS payments and be income in nature.” Unsurprisingly, “HMRC will consider whether any steps may be necessary to prevent capital treatment being applied where transactions are undertaken which do not support the policy objective and there is a possibility of tax avoidance, and will provide further detail in due course.”

There still remain some questions and a number of problems from the tax perspective. Taking the statements at face value and assuming the legislation is simple, the CGT calculation itself should be straightforward. There may be a base cost to at least some of the surrendered entitlements (and it is worth checking if there are any probate values involved), there may be CGT losses either available or capable of crystallisation, and there may be annual allowances.

However, one also needs to consider the claimant as well as the computation. There should be little problem for a sole trader, beyond looking at the timing of any other disposals and ensuring that maximum use is made of annual allowances and Business Asset Disposal Relief (BADR). Where partners are involved, which will more often be the case, the position is more complicated. One needs to look at who is making the disposal and in the absence of specific legislation or provisions within the partnership agreement, this would appear to be all of the partners, in the profit-sharing ratio, not just the retiree (the surrendered BPS entitlements will usually be a partnership asset).

Whilst this may mean that several annual allowances may be available, it will also mean that the amount of BADR that can be claimed is reduced. One will need to review the exact detail of the legislation to see how this will work through, but it certainly does not appear to be a simple case of claiming BADR on the whole proceeds (unless the partnership agreement facilitates that approach). It is also clear that the co-operation of all partners will be required to make a claim. This may be easy enough in some family partnerships, particularly because the lump sum will accelerate cashflows and result in them being charged to capital rather than income, but even if there is an overall tax saving, there will be winners and losers among the partners, and some will require complex calculations to be made to reimburse the continuing partners for their loss of income.

Finally, there is relatively little in the announcement for the corporate farm. Although the disposal of the entitlements will be a capital transaction, the company will (presumably) be the “vendor” and the gains are in any event charged to Corporation Tax. Only where there are existing capital losses or high base costs will there be any advantage. There is also the question of who receives the lump sum. If it is the individual, he will presumably need to reimburse the company for its BPS entitlements, and if the company is the claimant, it will need to find a way of paying out the retiree in a tax effective way. Fortunately, relatively few farms trade through a corporate route, and the lack of significant tax advantage may mean that difficult circumstances will be rare – though those which do arise might be challenging!