Most pre-existing farm subsidies have been replaced by the new Single Payment Scheme.

The rules surrounding the Single Payment Scheme are outside the scope of this note, but eligible farmers and landowners had a one off opportunity (by 16th May 2005) to establish their entitlement to these new Single Farm Payments (SFP) – their Payment Entitlement (PE).

The PE is the personal property of the farmer, does not attach to the land and is transferable, and various devolutionary issues arise out of that. The Inland Revenue have now issued their guidelines regarding the taxation of this new asset and this note seeks very briefly to summarise some of the main issues surrounding SFP and PE.

Income Tax

The SFP is a receipt for income (or corporation) tax purposes and taxed accordingly. The exact manner of its taxation will depend on whether or not it is received by a farmer (when it will constitute trading income), or by (for example) a farmer who has ceased agricultural production (so that there is no farming trade but may still be another trade) or by a non-farmer (say a landowner or someone keeping horses on the land). This distinction between whether the SFP is trading income or not is of much more importance for capital gains tax or inheritance tax than it is for income tax purposes.

Capital Gains Tax

PE is an intangible asset and not being linked to any particular parcel of land stands separately. It is not regarded as being derived from a pre-existing asset and is thus regarded as a new asset with a nil acquisition cost. If the SFP to which the PE relates is taxed as trading income and therefore used for trading purposes then it is likely that the PE will be regarded as a business asset and eligible for business taper relief accordingly. Similarly, hold over relief will be available and it will also be an asset for roll over relief purposes. Otherwise, it will be taxed as a non-business asset.

Inheritance Tax

Agricultural property relief will not be available on the value of the PE (it is not land) but business property relief will be available (even if PE has not been owned for two years) so long as the PE is an asset of or used in a trading business (whether farming or not).

Wills and Devolutionary Issues

For many farmers the viability of their farm may depend on the farmer owning the PE and being entitled to receive the SFP. As the PE is an entirely separate asset from the underlying land, if (for example) the farm is left by Will to the farming child and all other assets (including, by default, the PE) to the non-farming child then severe problems could arise for the farming child. But a gift to the farming child of the farm and also the farming business, or assets eligible for business property relief, should avoid this problem.

Old Wills should be reviewed and care taken when drafting new Wills to ensure (assuming that is the intention) that the PE and the farm devolve together.

For further advice please contact our team direct, or talk to your usual contact in the firm.