DEFRA and HMRC have at long last clarified the tax treatment of the proposed lump sum payment to be made to farmers to exit the industry.

The lump sum exit scheme was originally proposed last year but it was not clear whether it would be taxable as income or capital. It has now been confirmed that the intention is that it will be taxed as capital.

What is the lump sum exit scheme?

The lump sum exit payment scheme opens to farmers in England in April. It provides those leaving the agricultural sector with payments of up to £100,000.

In order to claim the exit payment, farmers must either sell their land, rent it out, give it away, or plant trees on it, and provided for payments of up to £100,000.

The lump sum sounds attractive, and certainly being taxed as capital will generate a likely lower tax bill than if taxed as income. However, the longer-term implications need to be considered, especially around issues involving Inheritance Tax.

The impact on inheritance tax

Farmers are generally eligible for Agricultural Property Relief on the agricultural value of their assets. However, should these assets no longer be used by them, this valuable relief may not be available.

If the land is sold and the proceeds are not reinvested into other qualifying assets, they would be subject to inheritance tax if the owner were to die.

Some could lose Agricultural Property Relief

If landowners hold onto the land and rent it out on a farm business tenancy, this could maintain the Agricultural Property Relief. However, if they remain in the farmhouse, as many retired farmers choose to do, they may lose Agricultural Property Relief on the value of the house as it will no longer be occupied by the farmer of the land.

There are also problems where the land has an increased development value. With more and more house building taking place and greater pressures on local councils for affordable homes there is a great temptation to cash in on development land.

If sold, then you are taking a potentially 100% exempt asset and turning it into a 100% chargeable cash pot.

If retained, although the land may still qualify for Agricultural Property Relief on its agricultural value, any potential development value would not qualify for such relief.

Those farmers planting trees on their land are also likely to lose Agricultural Property Relief on the value of the land, but they may qualify for Business Property Relief if it continues to be run as a commercial business.

All this means the family could end up with an unexpected inheritance tax bill down the line.

If anyone is thinking of accessing the scheme then please contact us before making the decision. You can speak to me or your usual Westcotts advisor.

Written by Ian McMurtry

June 30, 2022

Category: Blog

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