Martin O’Sullivan: Why Leasing Your Entitlements Is Better Than Selling It

Others who intend to lease their land – or those whose land and claims are currently leased – are not yet entirely sure of their position.

Changes under BISS

Under the Basic Payment Scheme (BPS), the payment was split into a basic income support, accounting for about 70 percent of the total.

The remaining 30 percent was greening, and most farmers qualified for the combined payment.

There are three elements under BISS: a basic income support element; an eco-scheme; and Complementary Redistributive Income Support for Sustainability (CRISS).

It is expected that most farmers will qualify for all three elements, but over the first four years of the program, higher payment value claims will progressively lead to a lower payment, while lower value claims will progressively lead to a higher payment.

For example, by 2026 a typical farm size of say 100ac with entitlements currently bringing in €450 per year will be reduced to €321, a decrease of 29pc. A claim that brings in €150 increases by 61 percent to €242.

Actual position

Farmers who sell entitlements in 2022 will suffer a 20 percent clawback claim – and it’s generally the seller who’s hit.

There will be no clawback for 2023 and 2024, so farmers who intend to sell entitlements would benefit significantly by waiting until 2023.

An exception might be those with higher value claims who could currently expect to hit multiples of 2½ times the payment value. Taking into account the 20 percent clawback that will apply in 2022, the net proceeds are double the payment value, which can be as good as possible from 2023 onwards.

So they might as well be sold before the May 2022 deadline.

Currently, higher value claims tend to fetch higher multiples of the payment value than lower value claims.

Typically, claims that yield an annual payment of €300 or more will yield 2½ times their payment value, while claims of €200 or less will yield a maximum of 2x.

This is likely to change, if not reverse, in 2023 as claims earning a payment greater than €260 will be reduced over 2023-26.

This could mean a drop of up to 45 percent for the highest-value claims, while the low-value claims could rise by a similar amount, subject to a maximum increase of around €80 per claim.

leasehold land and claims

“Armchair farmers” are now a protected species until at least 2026. They can continue to lease entitlements with or without land, provided the lease term is more than four years.

For leases with a term of less than four years, a reclaim of 10% of the number of claims will be made.

By the time this issue was resolved, some farmers had considered selling their entitlements, unsure if they would be allowed to continue the lease as they are not active farmers.

Now the only thing left to decide is whether the sale makes economic sense.

Claims that are rented out will be treated the same as any other claim as they will rise or fall in value over the years 2023-26 as described above.

However, as before, they remain unaffected by the value of the tenant’s claims.

advisory

Selling entitlements doesn’t make sense for anyone except those who are in dire need of help and who have no choice but to sell.

Even those with high value claims that face a significant cut would be foolish to sell as there is a reasonable possibility that the claims, albeit at a reduced payment, will still yield a respectable payment in any post-BISS system.

Second, there will be a capital gains tax. In the vast majority of cases, the entitlements were acquired free of charge, so the tax is 33 percent for those who have leased them in the past three years or more, and 10 percent for those who farmed the entitlements for three of the last five years.

The only possible exception is when entitlements are sold with land, in which case they may be exempt from tax.

If you are considering a sale, the sums need to be raised.

case study

Joe and Mary own 80ac (32ha) in common and have 32 claims currently yielding an annual payment of €300 each including greening.

In 2023 they want to stop farming, lease their land and sell their entitlements. However, they were advised that leasing the land containing the claims would be a better financial option.

They have a potential tenant offering a rent of €220/ac and willing to buy their claims at €700 each.

Alternatively, the tenant is willing to lease the claims for 80 percent of the resulting payment.

We’ll compare how Joe and Mary will fare over the first five years of BISS if they lease or sell the entitlements.

If they sell their allowances, the net sales proceeds after tax at 10 percent is €20,414. If they rent them out, they are said to receive rent of 36,922 euros over the first five years.

This income is tax-free, as the property and expectant rent together fall below the annual rent-free limit of €36,000 for co-owners.

So by keeping their entitlements, Joe and Mary will be better off by €16,508 over the next five years, not to mention the possibility that the entitlements will continue to yield a return after five years.

The advice is to resist the temptation to make a lump sum up front and stick to your claims.

Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is an agricultural business and accountant based in Carrick-on-Suir; www.som.ie