‘Look before you leave’: Five financial considerations of taking a lump sum to exit farming
23rd May 2021
HMRC have not yet confirmed how the proposed lump sums for exiting farming in England will be taxed.
However, financial advisers at NFU Mutual have urged farmers to ‘look before you leave’, as there are plenty of other tax considerations to take into account when choosing to leave the industry.
NFU Mutual, chartered financial planner, Sean McCann, said: “While we don’t yet know how the lump sum payments will be treated, it’s important for farmers to consider the other tax impacts of leaving the industry.”
1) Farmers who choose to sell in order to leave the industry
Capital Gains Tax
Sean explained: “Selling land and buildings can trigger a capital gains tax (CGT) charge. The tax is payable on the difference between the market value when you sell and the value when you acquired it – or 31st March 1982 if acquired before that date.
“A top rate of 20 per cent is payable on land and buildings and 28 per cent on residential property other than your main home.
“It may be possible to claim ‘Business asset disposal relief’ – previously known as Entrepreneurs’ relief – which allows the first £1m of lifetime gains to be taxed at 10 per cent.
“If reinvesting some or all proceeds into a new trading business it may be possible to claim ‘Roll over relief’ which defers CGT on the sums reinvested.”
Sean explained: “Selling land and building can also mean bigger inheritance tax bills.
“Agricultural land and buildings may qualify for Agricultural Property Relief (APR) which can mean that the agricultural value is free from Inheritance tax.
“If you’re using it in your business any development value may qualify for Business Property Relief (BPR) meaning that may also be exempt from inheritance tax.
“If you sell, the proceeds won’t benefit from APR or BPR and will be subject to inheritance tax.”
2) Farmers who choose to rent out land and buildings to leave the industry
Sean said: “If you rent all your land out on a farm business tenancy, you won’t qualify for APR on your farmhouse. This means that it will be included in your estate when it comes to assessing inheritance tax.
“If you have land buildings with development potential, you may still qualify for APR on the agricultural value. However, as they are no longer used by you in a trading business the enhanced development value will not qualify for BPR, meaning it will be subject to inheritance tax.”
Sean said: “Some farmers may choose to use the exit payment to set up a diversified business, but there are a number of potential inheritance tax traps to look out for.
“If a piece of land or a building stops being used for agricultural purposes it will no longer qualify for APR.
“BPR is available for ‘trading’ businesses but not ‘investment’ businesses. Common diversifications on farms that are likely to be deemed ‘investment’ activities include letting buildings for storage, workshops or offices and holiday lets.
“If your diversified business is likely to include trading and investment activities it’s important to take advice to ensure your family don’t end up with a large and unexpected tax bill in the future.”
4) Succession planning
Sean said: “If a farmer choosing to take these exit payments doesn’t sell but simply gifts their farmland or buildings to the next generation of the family, they may trigger a Capital Gains Tax bill. However, it may be possible to defer any Capital Gains Tax on the gift by claiming ‘Holdover relief’.
“If the farmer dies within seven years of gifting the land and buildings, the family may still be able to claim APR if they have continued to farm it and were still doing so at the time of the farmer’s death.
“If the farmer chooses to exit the industry by letting the land out on a farm business tenancy, they may still qualify for APR on the agricultural value meaning the agricultural value would be exempt from inheritance tax.
“As part of their succession plan, some farmers may choose to pass some or all of the exit payment to their non-farming children. While the children won’t face an income tax liability on the gift, should the farmer die within seven years, the gift will be assessed for inheritance tax.”
5) Tax-efficient ways of using the lump sum
For those who choose not to invest in a new business venture there is a wide range of options:
Sean said: “Pensions are one of the most tax-efficient ways to invest. For every £80, you pay in HMRC add an additional £20. If you pay 40 per cent income tax, you can claim up to an additional £20 back via your tax return.
“We are still awaiting clarity from HMRC on how the lump sum exit payment will be treated. If it is treated as taxable income in the year it’s received, this may push more farmers into the 40 per cent tax band.
“From age 55, you can choose when you take some or all of the money out of a pension, and 25 per cent of the fund can be taken tax-free, with any other withdrawals subject to income tax.
“Any money left in a pension on death can normally be passed on free of inheritance tax. Many farmers choose to invest in pensions as a form of succession planning, building up a fund that can be left to non-business inheriting children.”
Sean said: “A tax-efficient way to hold cash or share-based investments. Any income or growth generated is free of UK income tax and capital gains tax.
“You can invest up to £20,000 each tax year and you can normally access your fund whenever you need.
“Others may wish to help out family members with Junior ISAs or Lifetime ISAs.”