Farms failing to consider tax implications of diversifying

Many diversified farm businesses are leaving themselves exposed to paying more tax than they need to because they have failed to consider the inheritance tax implications of their changing business.

A survey of 200 businesses by NFU Mutual found that less than a third of diversified businesses had taken Inheritance Tax (IHT) reliefs into consideration when drawing up their business plans.

The rural insurance giant said this was a concern as some types of diversification could alter the tax treatment of land and buildings.

See also: Read more about farm diversification 

Sean McCann, a chartered financial planner at NFU Mutual, said getting the right structure for the diversified business could help preserve valuable IHT reliefs.

Agricultural usage

A key requirement in securing Agricultural Property Relief (APR) is that the land and buildings must be occupied for agriculture, so converting farm buildings into workshops, storage units or residential lettings will normally mean that APR is lost.

To qualify for Business Property Relief (BPR) the land or buildings must normally be used for “trading” rather than “investment” purposes, he added.

Diversifications that involve collecting rent with minimal management or provision of services – for example, holiday lets – are likely to be treated as investments and so are less likely to qualify for BPR.

“Where there is a mix of trading and non-trading activities within one business, it’s important to take advice to maximise the reliefs available,” Mr McCann said.

Depending on the nature and scale of the diversification there could be other tax implications including a risk to Capital Gains Tax relief and potential loss of farmer’s averaging, he added.

Tenancy issues

Farmers with an Agricultural Holdings Act (AHA) tenancy with the potential for succession also need to consider how any potential diversification could affect the chances of the next generation successfully applying for the tenancy.

The successor must pass a number of statutory tests to qualify for the tenancy, one of which is that in five of the previous seven years the applicant’s principle source of livelihood should have derived from agricultural work on the holding.

Non-agricultural income such as from diversification activities on the farm can count towards the income from agricultural work calculation, provided the landlord has given written consent.

Diversification plans

Other findings from NFU Mutual’s survey are that 20% of UK farmers are planning to diversify to support their farm businesses after Brexit.

Of those farmers who have already diversified, 25% said they were planning to further develop their non-farming enterprises.

The top choices for farmers looking to branch out are caravan or camping sites (27%), other holiday accommodation (20%) and renewable energy schemes (20%).

Nine out of 10 producers who have already diversified said their schemes had had a positive impact on the farm business.

In addition 63% said their diversification was either “vital” or “significant” to the financial viability of the farm.

The research findings have been published as part of a report setting out the opportunities and challenges for farmers considering diversification.

Things to think about when choosing a diversification

  • How productive is your core farming business?
  • Could you differentiate what you sell to capture new markets?
  • Could you be selling what you produce direct to consumers, especially if you process it yourself?
  • What assets are there on the farm and are they being used as effectively as possible?
  • What business opportunities are there from greater engagement from the public or environmental enhancement?
  • How can digital technology benefit the farm or create diversification opportunities?
  • Is the location suitable in terms of accessibility and planning constraints?
  • What are the tax implications of your business plans?
  • What are the insurance implications and what risk management strategies can be put in place?
  • Will grant assistance be available?

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

Find out more