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.