The application window for the Lump Sum Exit Scheme finally opened on 12 April after Defra published its paper on the scheme (and more recently detailed regulations) in February. The intention is to give farmers in England (the devolved nations are not part of this initiative) a financial incentive to leave the industry.
On the face of it, it’s a reasonable offer: a one-off lump sum, as a capital payment, in lieu of the direct payments you’d otherwise have received if you’d continued farming until 2027 subject, of course, to various provisos. The original idea behind the proposal was to encourage more farmers to retire completely from the business of farming, freeing up the land via sale, lease, transfer or gift, to the next generation or to new entrants. Now that we have the detail of what the scheme entails, will it actually deliver what the government intended? Does it represent a fair deal for farmers? And it can it work if the retiring farmer is part of a more complicated partnership or corporate structure?
Will it deliver what the government intended?
For those not born to farming, entering the sector can be difficult, particularly if they want to farm their own land. The government’s answer is to persuade farmers nearing retirement to hang up their boots in favour of new entrants. Given that the amount retiring farmers will receive is capped at £99,875 (a figure based on a maximum ‘reference’ amount of £42,500 x 2.35), no one will be able to retire on this sum alone without other pensions or income streams. It is certainly very unlikely to appeal to anyone whose average BPS income exceeds the cap. Nonetheless, for those farmers who have been thinking of selling, or transferring the business, lock, stock and barrel to the next generation, this additional nest egg might provide the necessary nudge. Overall, it is unlikely to encourage the numbers of retirees the government is hoping for.
Is it a fair deal?
The government has opted to subject the lump sum to capital gains rather than income tax which makes the prospect more appealing. For those farming smaller acreages and for those in marginal areas, this might provide the right opportunity to exit before 2027 and the withdrawal of all subsidy payments. Farmers whose BPS entitlements are considerably more than the cap, even with the tapered withdrawal of subsidy payments, are less likely to benefit. However, the terms of the deal are absolute: all applicants must have been eligible for BPS in 2018; land must be transferred, sold or gifted (or, if a tenancy, surrendered, assigned or transferred by succession) by 31 May 2024; and all BPS entitlements surrendered. Given that the application window is only six months long (April – September 2022), applicants can continue to apply for the BPS both this year and next just in case their application fails. If it succeeds, the BPS payments received will be deducted from the lump sum. If applicants have already entered into grant agreements such as the SFI or certain environmental options, they will have to repay anything they have received under those schemes. So, is it fair? Yes for some – but it is of questionable value for many.
Will it work for partnerships?
As we see in the Moreton v Moreton case, the law of unintended consequences has a habit of intervening when partnership structures, share allocation, and land and asset ownership are not considered in the round, and properly and clearly documented. The exit scheme allows for partners holding more than 50% of the profit allocation (or spouses holding over 50% between them) to apply for the lump sum providing they transfer all the land held in their name to the other partners, surrender the BPS entitlements attached to that land, and leave the business entirely. The remaining partners can continue to farm and apply for other grants but they cannot claim any entitlements on the transferred land. This will also affect the total amount of delinked payments, which take effect from May 2024, that can be claimed as they will be determined by previous BPS entitlements.
For this to work, partners will have to have a clear audit trail of who owns what, where, and since when - otherwise they risk falling foul of the scheme requirements. For many farming partnerships, trying to disentangle the web of ownership across different generations will be a major undertaking. It also means that the older generation have to properly retire from the farm. That may be a step too far for some.
Recipients of the lump sum can remain in the farmhouse after they have transferred / sold their land - but separating the house from the land has inheritance tax implications as the former will no longer be eligible for APR. There may also be capital gains tax implications for the continuing partners in the business if land is gifted to them which has a very low acquisition value and a hold over claim is made. Likewise, retiring tenant farmers will need to have additional funds as the lump sum will not be sufficient to buy a house. An alternative to getting rid of the land could be to plant it with woodland (which would need to be done by 31 May 2024) but again, there are tax implications depending on how the wood is used. Finally, any gains from selling the land will be subject to tax unless they are reinvested in qualifying assets (such as a business or other land).
In short, this scheme is likely to have limited appeal for the majority of farmers. Although there is nothing to prevent them pursuing other jobs, such as contracting, or working as an employee, the sums involved are not life changing and for some will create additional tax liabilities. However, for those already thinking of leaving the industry – and particularly for those in partnerships – it is worth doing the calculations but only in conjunction with an adviser who is au fait with the tax and other implications.