Farm diversification – how does that affect your tax position?

With changes to agricultural subsidies looming, farmers are looking increasingly to diversification to help them maintain their income – around 48% of UK farmers are diversifying, double the level in 2018, according to insurers NFU Mutual.

Direct payments are being phased out over a period of seven years from 2021 in England. Instead, there will be a new approach, rewarding farmers with public money for “public goods”. These “public goods” include enhancing biodiversity, tackling climate change and raising standards of animal welfare.

In order to boost income, farmers are now, more than ever, creating farm shops, holiday cottages and even wedding venues. But these new uses of land and buildings could have a tax impact, especially in relation to potential Agricultural Property Relief (APR) – any change of use can also affect Inheritance Tax.

In some cases, diversification projects may qualify for Business Property Relief (BPR) instead of APR; however, the land or buildings must be used for trading rather than investment purposes. Taking the example of holiday cottages, this is likely to be treated as an investment rather than trading and so would not qualify for APR or BPR, meaning the potential 100% tax relief is no longer available. This could have a knock on effect and subsequently lead to a large Inheritance Tax bill.