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Single Farm Payment Entitlements

publication date: Jun 23, 2008
 | 
author/source: Luke Haslam
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ruralFor members practising in rural areas, there may be occasions when they are asked to value/sell a country property with land. It may not be a working farm, simply a property with a few acres of land, but in some circumstances Single Farm Payment Entitlements are involved. 

In this article I hope to provide members with a basic overview of the scheme and how it may affect members working in rural areas. This article is not intended to be a detailed account of The Single Payment Scheme. It is very complex and I could easily take up this entire publication! It is an introduction for members who may be asked by clients to sell/transfer entitlements as part of a rural property sale. 

Background to the Single Payment Scheme 

Briefly, the Single Payment Scheme (SPS) was introduced through the Common Agricultural Policy. It replaced the system of subsidies paid to farmers. The old system was based on production, but SPS is based on the area of land farmed. 

There are two elements to a unit of SPS entitlement

  • an historic element based on previous subsidies; and
  • a basic Regional Average Payment (RAP). 

Each year the historic element is reduced, and the regional element increased. This will continue until 2012 when the scheme is due to end. 

Initially, farmers were allocated one unit of entitlement per hectare of land owned. Entitlement holders can only claim SPS entitlements against the number of hectares at their disposal. 

The entitlements are split into various areas. Upland farmers claim Severely Disadvantaged Area (SDA) entitlements on account of limited agricultural options on such land. Lowland farmers are allocated non-SDA entitlements, reflecting the greater range of agricultural options available. 

There are also different entitlements for English Moorland, Northern Ireland, Scotland and Wales. 

Entitlements have a use-by date, and if not claimed by the stated year, are lost. You must consider this when looking at whether to transfer the entitlements or not. 

There are a number of complex issues relating to scheme compliance which are unlikely to apply to NAEA members, but which need to be fully understood by anyone advising clients on an annual claim application. 

Who holds SPS Entitlements? 

Whilst the majority of those holding SPS entitlements are full-time farmers with a significant number of hectares, it is not uncommon for smallholders/residential owners with a couple of hectares of land to have SPS entitlements. This may have been allocated when the scheme was set up, or acquired through a farm being split up for sale. 

For example, last year we sold a range of farm buildings for development into three residential units. Each unit included approximately 1.5 hectares of land. The land was registered for SPS, and therefore the entitlements were transferred to the purchasers at market value when they were sold. Tenants of farms and smallholdings can also own SPS entitlements, but they may need to dispose of them if a tenancy ends. 

When will members have to deal with SPS Entitlements? 

It is most likely that members will encounter SPS entitlements when they are asked to act as selling agent for a country home with land. Working farms and estates tend to be dealt with by specialist agricultural firms. Entitlements belong to the landowner and do not automatically change ownership with the land but entitlements can only be claimed if the claimant has possession of sufficient land. 

  • There are a number of situations where members may come across SPS entitlements:
  • Most transfers of entitlements are linked to the sale of land, and are usually agreed directly with the land purchaser.
  • Some are sold on the open market. This is either created by people who wish to buy higher value entitlements than their own to generate a financial return, or by those who have registered land but no entitlements to claim against it.
  • Acting for a client who wishes to let their property. This is perfectly possible, but there are special guidelines attached to this:
  • The number of entitlements leased must not be greater than the number of hectares leased;
  • The period of the lease must be the same for both land and entitlements; and
  • On expiry of that period entitlements automatically revert back to the original claimant. 

Valuing Single Payment Entitlements 

It is often simplest to include relatively low value entitlements in the sale price, as their face value may only be a couple of hundred pounds. This removes the need for protracted negotiations, and the need to find a potential third-party buyer. 

For example, the face value for the 2008 scheme year was 138.90 euros per unit for basic regional non-SDA entitlements. Surveyors reported they traded at between 2 and 3 times face value, so the amounts involved for a few hectares are often relatively small. 

There was a good market for lower value entitlements this year for those that decided to trade them on the open market. The risk though is that if a third party buyer is not found, the client could be left with no land against which to claim. 

Higher value entitlements can be worth thousands of euros per hectare depending on the historic element allocated to the farmer. The higher value entitlements traded at typically 1 to 1.5 times face value this year. The agent must establish a market value. The best way of doing this is on a simple comparables basis. There are a number of agricultural surveyors who hold auctions of entitlements, so good comparable evidence is available. Many firms also have a system of online trading, whereby the entitlements available are shown on their website, along with the price they are hoping to achieve. 

Higher value entitlements are not normally included in the agreed sale price. They are usually transferred by separate negotiation, given that market value could potentially be tens of thousands of pounds. Many firms stipulate in the sales brochure and contract of sale that the purchaser of the land/property is obliged to buy the entitlements at market value. This removes the potential issue of finding another buyer. 

Like any market, it is a process of negotiation based on supply and demand, so stated asking prices on websites are not necessarily selling prices. 

Values are usually determined as a multiple of face value. Lower value entitlements tend to trade at higher multiples. I suspect this is partly down to the sums of money involved, but primarily because as the regional element of the entitlement increases year on year the historic element that makes up the bulk of the higher value entitlements decreases. 

Most of the cases where NAEA members will be asked to deal with SPS entitlements will be the sale of small holdings or residential property with land. The valuation of entitlements in these cases should be relatively straight forward on a comparable basis. 

The actual transfer – the paperwork 

Once agreement has been reached over the sale of entitlements, the Rural Payments Agency (RPA) stipulates an RLE1 form must be completed. The RPA issue a useful guidance note, but this is a relatively simple document to complete as long as all relevant information is to hand. Some of the information is preprinted on the form, for example the seller’s name, address and RPA customer identification number, which is also known as the SBI number (single business identifier). 

 RLE1 form must be submitted to the RPA by the stated deadline. It is advisable to have a contract between the buyer and seller if entitlements are to be traded as a separate deal to the property transaction. For members of The Central Association of Agricultural Valuers, a template is available on the website otherwise a local solicitor should be able to draw up a simple document. 

If the entitlements are included as part of the property transaction, provision can be made within the sale contract. 

luke
Should any member wish to contact me for further information, they can do so by emailing luke@addisons-surveyors.co.uk 

Luke Haslam is a qualified Chartered Surveyor and estate agent practising with the firm of Addisons Chartered Surveyors and Auctioneers in Barnard Castle, Teesdale. Luke is on The National Association of Estate Agents Rural Practice Forum.


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