Basic Payment Scheme - Lump sum exit scheme and delinked payments

Subscribe

We are all are aware that the Basic Payment Scheme (BPS) in England is being phased out between now and 2027, and that this will have a massive impact on farmers, but how will the lump-sum exit scheme work, together with the de-linking of the remaining BPS payments from 2024? And what about capital losses that will arise when entitlements cease to have any value?

A lump-sum exit scheme had been promised for several years, without any detailed proposals being issued. The detail finally arrived in February 2022 with the aim of encouraging a dignified exit from farming for some businesses, with our view being that the majority of applicants will be those who had already decided to exit the industry.

The key points of the scheme are as follows:

• Applications to the scheme can be made between April 2022 and 30 September 2022.
• Applicants must have claimed BPS in 2018 or have inherited land since 2018.
• A claimant must do all of the following before receiving the lump sum:
  
  • Transfer agricultural land that was at your disposal in May 2001, either by sale, gift, or entering into a Farm Business Tenancy for a minimum of 5 years.
  • Transfer or surrender any tenancies or grazing rights.
  • Surrender your BPS entitlements.
• The deadline for meeting the above conditions is 31 May 2024.
• A partnership or limited company can claim the lump sum providing partners entitled to more than 50% of profits, or shareholders holding 50% or more of the shares, leave the business. The business must surrender all its BPS entitlements and cannot claim BPS in the future.
• The lump sum is based on the amount of BPS paid in 2019, 2020 and 2021. The average BPS paid in these three years is multiplied by 2.35 but is capped at £100,000.
• A business which claimed BPS as normal for 2022 can still apply for the lump-sum before 30 September 2022. The subsequent lump sum receivable is then reduced by the amount of the 2022 BPS. The 2022 BPS is then treated for accounting and tax purposes as a capital gain rather than income.

Final guidance issued by the RPA has confirmed that the BPS lump sum will be subject to capital gains tax (CGT) rather than income tax. We always considered this to be the correct treatment as it was a capital sum for surrendering BPS Entitlements and is good news as the rate of CGT will be either 10% or 20%, rather than the higher rates of income tax and national insurance payable on trading profits.

However, careful planning is essential to ensure that a claim to Business Asset Disposal Relief is available, and the gain is all taxed at 10%, rather than 20%.

From 2024, it will no longer be necessary to make an annual claim for BPS, or to occupy land to be eligible for a payment. The rationale for this change is that as annual payments become smaller, the cost of administering claims become disproportionately high.

To receive a delinked payment, it will be necessary to claim BPS in 2023, but the payment will be based on an average of 2020, 2021, and 2022 claims. The main beneficiaries of the scheme will be those who have reduced farming operations since 2020 but will still be claiming BPS on at least 5 hectares in 2023. Unlike the lump-sum, de-linked payments will still be subject to income tax.

Once BPS claims have been made in 2023, BPS entitlements are likely to be worthless. Farmers who have purchased or inherited BPS entitlements will be able to claim a CGT loss, which can be offset against future capital gains.