Tax considerations for diversifying farmers

Not only can diversification open up new sources of revenue, it can also offer business opportunities to younger members of the family.

However, before making any changes, it’s important to consider the tax implications to ensure your family don’t end up with a large and unexpected tax bill in the future.

Inheritance Tax (IHT) earned the government £7.09 billion in 2022/23. Receipts rose by £1.04bn and is the largest single-year rise in IHT receipts since 2015/16 when receipts rose by £848 million.

Many family farms benefit from Agricultural Property Relief (APR) and Business Property Relief (BPR), which can reduce or eliminate IHT on farming and other business assets.

A key requirement in securing APR is that the land or buildings must be occupied for agriculture, so converting farm buildings and letting them out for non-agricultural use, such as workshops, storage units or residential letting, will normally mean that APR is lost.

In order to get BPR, the land or buildings must normally be used for trading rather than investment purposes. Diversifications that involve collecting rent with minimal management or provision of services, are likely to be treated as investments and so less likely to qualify for BPR.

Getting the structure of the diversified business right can help preserve valuable IHT reliefs.

Succession planning

Diversification can offer options when it comes to planning how best to handover the family farm to the next generation. Having a succession plan in place not only allows for a smoother transition, but it can also play a big part in securing the future of the family business.

Latest research* commissioned by NFU Mutual shows that farmers are planning for the future of their farm; with 48% reporting that they have a succession plan in place in 2023.

There’s no ‘right’ answer when it comes to succession – each family’s situation will be different. The key things are to plan early (the earlier you plan the more options you have), involve the family and take advice to ensure that you and your family don’t pay more tax than you need to.

Talk to a financial expert

Whether you’re thinking about stepping back from the management of your farming business or would like financial advice, we can work with you to put a personal financial plan in place, to help you achieve your goals. You can speak to a financial adviser by calling 0800 622 323 or request a call back.

*Source: NFU Mutual’s Voice of the Farmer research June 2023, sample size of 1,703.