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Questions to answer around farming retirement payment consultation

28 Jun 2021

A consultation on one of the key elements of the government’s Agricultural Transition Plan has begun – and the outcome looks likely to have a significant impact on the farming industry for decades to come.

As part of the policy changes planned in the wake of the UK leaving the European Union and the phasing out of the existing Basic Payment Scheme by 2027, the idea of a lump sum exit scheme has been put forward with a view to encouraging generational change in the industry.

Farmers who are seeking an opportunity to retire would be offered a lump sum cash payment to step away from farming by surrendering their Basic Payment Scheme entitlements and putting their farm on the open market for sale or to rent, surrendering it back to their landlord or passing it on to family members, in whatever way is most appropriate.

The exact payment sum would be calculated with reference to the applicant’s recent Basic Payment Scheme payments, although the total payment is expected to be capped at £100,000.

Applicants will need to look to the possible sale of land, livestock and machinery to top up this figure to give the retiring farmer sufficient funds on which to retire. Tenant farmers may be looking to their landlords to assist in bridging the gap.

Given that the average age of a British farmer is around 60, there has been a lot of interest in the consultation, and much dialogue surrounding what is understandably an emotive issue for many.

Farmers, by and large, rarely ‘retire’, and there is often a reluctance around passing on or selling a business into which many have been born and which may have been their entire life’s work.

Issues around succession planning are common in farming businesses, and any discussion about what happens next with the business definitely needs to include more than one generation, especially if there is no natural successor in place who is ready, willing and able to take over.

The conditions for receiving the lump sum payment are likely to be relatively strict, and will require the present farmer to make a clean break with the business, rather than, as the temptation for some might be, to step aside in name only and remain in de facto charge of operations.

It is not yet clear how (or indeed if) the lump sum payment will be taxed and what impact it will have if the retired farmer dies within seven years of having given away their farm.

These will be important factors for potential applicants and their professional advisers to consider once more guidance is available.

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While 2027 may seem a long way away, in business terms, it really isn’t, and we’re already talking to farming clients about the ways in which they might diversify their businesses to replace the money that’s going to be lost when the direct payments stop.

Banks and other funders are beginning to ask for long-term business plans to ensure that farming businesses are going to remain financially viable, and it may be that the thought of the effort involved in options like holiday cottages, solar farms or new financial schemes focusing on the environment may be enough to make some farmers look more closely at what the lump sum payment scheme could offer them.

The capital requirements for new entrants to the farming sector are also going to be significant and a detailed strategy for how they are going to make a success of any new venture is going to be required. The government is planning to deliver something in the coming years to incentivise new entrants.

All in all, it makes sense for anyone with an interest in the future of farming to engage with the consultation process.

It remains open until 11 August, and there are a number of questions on the Defra website which anyone who’s interested can answer. It is proposed that applications for lump sum payments will be invited in 2022, so farmers are encouraged to get those difficult conversations underway as early as possible if they want to take advantage of the scheme.

We’ll be watching with great interest to see what conclusions are eventually drawn from the responses and how they will influence the shape of farming policy in the coming years.

For further information on all aspects of farming and rural business operations, please contact Joanne Milne at Hay & Kilner Law Firm on 0191 232 8345 or via joanne.milne@hay-kilner.co.uk