9 things you need to know about Defra’s lump sum exit scheme

Three months later than originally promised by Defra, farmers in England finally have some clarity around how the lump sum exit scheme will work.

The lump sum scheme has been designed to make it easier for farmers who wish to retire or leave the industry to do so, which the government says will free up land for new entrants or existing farmers who want to expand.

The scheme will work by paying applicants their future BPS money up front, in return for surrendering their BPS entitlements and transferring out their land.

However, with a capped payment of £100,000 and a host of other retirement issues to consider, will this be a big enough incentive for farmers to walk away at short notice? In truth, we suspect this is going to be of limited interest although will certainly start a lot of conversations.

Key details of the scheme are as follows:

1. The lump sum application window will run from April to September 2022.

2. Payments will be calculated by reference to the average Basic Payment Scheme (BPS) payment received in 2019 to 2021 multiplied by 2.35, but with a total payment cap of £100,000. This means that anyone with an average BPS claim of less than £42,500/yr during the reference period will not be affected by the cap.

3. Before an applicant receives their lump sum payment, they must have transferred out their agricultural land in England (they can only keep up to 5ha) or plant it with trees under a woodland creation scheme. They must also surrender their English BPS entitlements.

4. Farmers are being advised to apply for BPS in 2022 even if they are applying for the lump sum scheme. This will offer protection if they find they are not eligible for the lump sum or cannot complete the transfer of the land in time.

5. The final deadline for land to have been transferred out and BPS entitlements surrendered is 31 May 2024. Farmers who end up receiving a BPS 2022 payment (or BPS 2023) because surrendering their land takes some time, but later meet the rules of the lump sum scheme, will have the value of those BPS payments deducted from the lump sum due.

6. Where the business is a partnership or limited company, they will need to apply to the scheme as a partnership or limited company, as happens with BPS. However, it will be possible to use the scheme where only some members want to leave or retire from farming, such as parents leaving the business to their children. For example, a partnership can still apply for a lump sum payment if the partner wanting to leave has 50% or more interest in the profits of the partnership, or there is more than one partner wanting to leave with a combined interest of 50% or more. The partners who are leaving can transfer the land to the remaining members of the business.

7. As they will no longer be farming, applicants may need to repay back any money received through the Farming Investment Fund or the Countryside Stewardship Scheme (CSS) unless the CSS agreement can be transferred to the person taking on the land.

8. One of the critical questions that many people had during the consultation period was how lump sum payments might be taxed. Defra has confirmed that it intends to introduce legislation so the payments will be treated as capital in nature and will be subject to capital gains tax, or corporation tax in the case of incorporated entities. This means existing capital gains reliefs will be available where the qualifying criteria are met.

9. A farmer who decides to take the lump sum, will still be able to work as a contractor or work for other farmers if they wish.

If you are considering retirement and succession issues, we can help you navigate your way through the schemes on offer. Contact head of farming Jonathan Armitage.