Basic Payment Scheme (BPS)

It is important to understand the background to BPS (formerly known as the Single Payment Scheme). In simple terms it operated to separate farming subsidies from production. Entitlement potentially arises in the hands of farmers and non-farmers but is subject to various conditions and standards, such as keeping the land in good agricultural and environmental condition. A substantial payment of the entitlement in 2005 was expected to provide income support for the following eight years but, thereafter, anyone wishing to receive the subsidy could only do so through acquisition of an entitlement from someone entitled to receive it.

For IHT purposes, the entitlement is subject to the normal rules concerning transfers of value and the death estate and thus the transfer of the entitlement may attract IHT as with any other asset. It is, though, a separate asset falling outside the definition of ‘agricultural property’ in IHTA 1984, s 115(2) and cannot therefore qualify for APR, although BPR may be available. However, transfers of entitlement as an individual asset by non-traders (as opposed to a business or interest in a business) will not qualify for BPR.

In current times, again reflecting the impact of UK Brexit from the EU, 2021 saw the phased introduction of the Environmental Land Management System (ELMS) tracking the ultimate demise of the BPS scheme. The process introduced the implementation of a seven-year transition away from EU-based rules of BPS towards the innovative ELMS encouraging best practice by paying farmers to improve the environment and animal health/welfare, and reduce carbon emissions. Between 2024 and 2027, BPS will be replaced with ‘delinked payments’ which remove the link between payments and the land. Delinked payments will decrease each year as progressive reductions are applied based on a sliding scale with payments based on the original BPS entitlement phased out in its entirety by 2027 (and existing agri-environment schemes will also close) with potentially alternate funds available through schemes and grants.

For 2024, the position is as follows:

For example, a BPS amount of £40,000 would have a 50% reduction applied to the first £30,000 of the payment (a reduction of £15,000). A 55% reduction would be applied to the next £10,000 (a reduction of £5,500). The payment would be reduced by £20,500 to £19,500.

There has been mounting concern that not all of the ELMS initiatives would meet the strict qualifications of APR noting that in the past specific statute provision had to be introduced to provide continuing APR coverage for the habitat schemes ( IHTA 1984, s 124C). However, this has now been partly addressed by Finance (No 2) Act 2023 which contains proposals to extend APR to cover certain types of environmental land management (ELMS). As part of this process, HMRC launched a consultation exploring ‘elements of the tax treatment of ecosystem service markets and environmental land management’, whereby:

• Part 1 was a call for evidence on the tax treatment of the production and sale of ecosystem service units. The aim is to understand the commercial operations and the areas of uncertainty in respect of taxation.
• Part 2 was a consultation on the scope of APR. The aim is to explore the extent to which the current scope of agricultural property relief may represent a barrier and, if necessary, potential updates to the scope of the existing land habitat provisions in the relief.

Initially, HMRC also intended to use the consultation as an opportunity to explore in more detail a recommendation made in the Rock Review of tenant farming in England (published in October 2022) to restrict the application of 100% APR for tenancies in excess of seven years, but this ‘restriction’ has now been withdrawn. The consultation closed on 9 June 2023 with the outcome published alongside the 2024 Spring Budget announcing that from 6 April 2025 APR will be extended to include land managed under an environmental agreement entered into with, or on behalf of, certain public bodies. This action was confirmed in the Autumn 2024 Budget.