A word of caution – the tax implication of the Defra’s lump sum exit scheme are not yet known
We are advising farmers not to make any succession or retirement plans involving Defra’s lump sum exit scheme until the full tax implications are known later this year. Each farmer’s circumstances will be different and this might be beneficial for some, but not for others. In some cases, the tax consequences of joining the scheme could potentially be disastrous.
We understand that Defra is consulting with HMRC on the tax treatment and the outcome will not be known until October. This lump sum may be treated as trading income just as Basic Payment Scheme receipts are, or it may be taxed as a capital gain with more favourable tax rates, which would mirror the tax treatment of selling Basic Payment Scheme entitlements.
There are other considerations which farmers need to think about. As the scheme requires the land to be sold, gifted or rented out please note that Capital Gains Tax will apply on both sales and gifts of land.
If you ceased trading this would, in most cases, mean disposing of assets, whether that be the whole of your trading stock or other assets such as machinery and farm vehicles. Where the annual investment allowance has been claimed on machinery, the whole of the disposal proceeds would be taxable as income. This one off increase in profits could give rise to a significant Income Tax charge especially if the lump sum exit payment is taxable as income.
Please also speak to us about the potential detrimental impact on your Inheritance Tax (IHT) position of renting out land. Based on current rules, farm business tenancies could be used to maintain relief on the agricultural value of the land. However, due to the loss of Business Property Relief there would be no relief on any hope or development value. It is important to note that there would be no IHT relief available for the farmhouse. The loss of these valuable reliefs could cost your loved ones more than the exit payment itself.
Our advice would be to wait until the tax implications become known and then speak to us to see how it will affect you in your particular circumstances. Only then, can you make an informed decision on whether the scheme is right for you.