BPS losses: Opportunity for farmers to save Capital Gains Tax

The abolition of the Basic Payment Scheme (BPS) in England is causing great worry to farmers as the fall in income is placing financial strain on many businesses. The scheme continues until 2027, but from 2024, the payments are de-linked which means that it is no longer necessary to hold BPS entitlements to receive payments. As a result, entitlements ceased to have any value on 16 May 2023.

However, this may give farmers the opportunity to generate a Capital Gains Tax (CGT) loss which for many will result in a significant tax saving in the future.

What can the loss be used against?

This is a capital loss and can only be offset against capital gains in the year of claim or future years. There is no limit to using the loss once it has been established, so for example, it could be claimed when a cottage is sold five years later.

How is the loss calculated?

The entitlements are now worthless, so the loss is the cost of any entitlements purchased plus the value of any inherited or received by gift.

What is the time limit for claiming?

There is no deadline as such, but to offset a loss in a tax year, the claim needs to be made within two years of the end of the tax year. Given there is no limit to using the loss, it is better to claim as soon as possible so that they are not forgotten.

What is the saving?

Capital gains are currently taxed at 28% on residential properties and 20% on land and other property. For example, a loss of £50,000 claimed against a gain on a farm cottage will result in a tax saving of £14,000. The actual saving will depend on the rates of CGT in place when the loss is offset, so if rates increase in the coming years, the savings will be greater.

Particular problem areas

• Land purchased with entitlements 10 years ago, but the price was not broken down.

In most cases, the price of land should have been broken down to obtain a Stamp Duty Land Tax saving by allocating part of the price to BPS entitlements. It is possible to retrospectively obtain a breakdown of the purchase and include the price of the BPS entitlements in the loss calculation.

• Land and share in partnership inherited on the death of a family member, but no valuation of entitlements carried out.

This is a common problem in that business assets usually qualify for 100% Inheritance Tax (IHT) relief. This sometimes means that the book value or accounts value of partnership capital is used in order to save on the time and expense of obtaining a professional value for IHT purposes. Fortunately, unless a valuation has been formally agreed for IHT purposes, it is not binding on a future CGT disposal.

• Sharing of losses between members of a family partnership.

The losses should be allocated according to the partnership agreement. If there is no agreement, or it does not specify how capital losses should be shared, then they should be shared in the same proportion as normal trading profits. As can be seen, this is a complicated calculation, and it is therefore essential to take specialist advice if future tax savings are to be obtained.

Future tax savings

Despite the impending loss of BPS payments, farm businesses should make sure the opportunity is not missed to generate a CGT loss now, as this could save thousands of pounds in tax savings in the future.