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Farm Diversification – Tax Considerations And Consequences – Income Tax



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Diversification can lead to new sources of income, and may also
be an attractive business project for younger generations of
farming families looking for long-term financial stability. With
the number of UK residents opting for ‘staycations’
since the COVID-19 pandemic, diversification has become an
increasingly desirable tool for farmers and land owners to access
new means of revenue. However, diversification can have a negative
impact on your inheritance tax (IHT) position and could exclude the
availability of valuable IHT reliefs. Before making any changes,
it’s important to consider what tax implications might lead
from diversification, to ensure your family doesn’t end up
with a large and unwanted tax bill in the future. 

Agricultural Property Relief (APR) 

Many farms benefit from Agricultural Property Relief (APR),
which can reduce, or completely wipe out, IHT on farm land and
buildings. Briefly speaking, APR requires that the land or
buildings must be occupied and used for agricultural purposes. This
can include farmland, barns and storage buildings, farmhouses and
farm cottages. When considering the availability of APR, HMRC will
look at the different uses of the land or property and the way it
is used and occupied.

Changing the use of such land and property from agricultural to
non-agricultural use risks the asset in question no longer
qualifying for APR and therefore becoming subject to IHT. 

One popular method of diversification in recent years has been
converting existing agricultural land or buildings into holiday
lets, or camping and glamping sites. However, applying the above
rules, these assets would no longer benefit from APR.
Diversification by a tenant of your land away from agricultural use
can also affect your eligibility for APR as the
landowner. 

Business Property Relief (BPR)

Some diversified assets may qualify for Business Property Relief
(BPR), which can also reduce or eliminate IHT. In order to benefit
from BPR, the asset, land or buildings must be used for
‘trading’ rather than ‘investment’
purposes. Therefore assets owned for the purpose of collecting
rental income without much management, or any extra services, will
likely be considered to be ‘investments’ and therefore
less likely to qualify for BPR. 

Common diversification projects on farms that are likely to be
deemed ‘investment’ activities include holiday lets. If
the level of additional services provided is particularly high,
then HMRC can consider the business as ‘trading’ rather
than ‘investment’, however, this is difficult to judge
and each case must be treated on its own facts. 

Is there a quick solution?

There is no ‘right’ answer when it comes to
diversification. All farms and all families are different, with
individuals having their own preferences and motivations, so there
is no “one size fits all” approach. There are options
when it comes to mitigating the potential IHT bill, such as
insurance policies to cover IHT bills and making lifetime gifts,
however, these are not without their own consequences and as a
result no one should take such steps without speaking with a
qualified advisor first. As with everything in life, the best
option will depend on your individual circumstances.

If your diversified business is likely to include trading and
investment activities, then it’s important to discuss the
potential tax consequences with a specialist advisor, such as one
of our Private Client solicitors. 

Originally published 27 July 2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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