Considerations before diversifying your farm

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.

Sean McCann, chartered financial planner at NFU Mutual, offers expert financial advice for farmers looking to diversify.

1. Inheritance Tax – Agricultural Property Relief

The government collected £5.3 billion in inheritance tax in 2020/21, a figure that has nearly doubled in the past 10 years. Many family farms benefit from Agricultural Property Relief (APR), which can reduce or eliminate inheritance tax on farm land and buildings.

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 will normally mean that APR is lost and could lead to a larger inheritance tax bill.

2. Inheritance Tax – Business Property Relief

Some diversified businesses may qualify for Business Property Relief (BPR), which can also reduce an inheritance tax bill. 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. Common diversifications on farms that are likely to be deemed ‘investment’ activities include letting buildings for storage, workshops or offices and holiday lets.

If your diversified business is likely to include trading and investment activities, it’s important to take advice. Getting the structure of the diversified business right can help preserve valuable inheritance tax reliefs.

3. Capital Gains Tax

Some farmers diversify to provide the younger generation with business opportunities. If they gift land or buildings this could trigger a Capital Gains Tax bill.

Capital Gains Tax is payable on the difference between the market value when you gift and the value when you acquired it – or 31st March 1982 if acquired before that date. A top rate of 20 per cent is payable on land and buildings.

It may be possible to defer any Capital Gains Tax on the gift by claiming ‘Holdover relief’.

4. Succession planning

Diversification can offer options when it comes to planning how best to hand the family farm on to the next generation, particularly if there are children who don’t wish to farm but are interested in the new business.

Having a succession plan in place not only allows for a smoother transition, it can play a big part in securing the future of the family business. However, the latest research commissioned by NFU Mutual suggests 48% of farmers have a succession plan.

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