A topic that seems to be hot in the press is Defra’s Lump Sum Exit Scheme (LSES). The scheme has been proving popular, but applications are only open until 30 September 2022 and the tax implications have only recently been announced.
This payment is not extra money but is future Basic Payment Scheme (BPS) payments rolled together in a single sum for those within the industry looking to retire. BPS being phased out by 2027 which may be reflected in the number of farmers who have already applied for the LSES. This us believed to be roughly 700 so far.
The government has now confirmed, through a policy paper released on the 20 July by HM Revenue & Customs (HMRC), that the lump sum payments from LSES will be deemed as capital receipts, and therefore subject to Capital Gains Tax (CGT).
Looking at currently CGT levels for higher-rate taxpayers, 28% is payable on gains from residential property and 20% from other chargeable assets. In comparison, basic-rate taxpayers are looking at 18% charges on residential property and 10% on gains after allowances and reliefs. Companies making capital gains are currently being charged 19%, the same rate as corporation tax.
There are several eligibility factors of the LSES that need to be highlighted:
- BPS must have been claimed for in 2018
- farmers must have inherited or took succession of farmland on a 1986 Act tenancy or are executors that will remain trading until 2024
- All farmland is to be given up, apart from 5ha (yet the retention of houses, buildings and woodlands is not included within the 5ha).
For full details of this guidance and criteria please visit the LSES page of the gov.uk website.
Martyn Dobinson, partner at the Chartered Accountants Saffery Champness commented, “Given the eligibility criteria to qualify for the retirement payment, the requirement for the claimant to have claimed under the Basic Payment Scheme in the 2018 claim year (or to have subsequently inherited agricultural land), and the requirement to claim the payment before 30 September 2022, taking advantage of typical CGT mitigation strategies such as transferring between spouses to benefit from a spouse’s available allowances, and timing of a disposal to benefit from renewed allowances, will not be possible.”
Even so, there may be several are approaches to mitigate the effects of CGT. Rates vary for every individual and the mitigation strategies may be restricted, so it is important that you seek expert financial advice.