Farm Diversification ' Tax Considerations And Consequences

• Published date: 15 August 2022
• Subject Matter: Tax, Inheritance Tax, Income Tax
• Law Firm: Lanyon Bowdler
• Author: Dewi Jones

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...