Considering the long-term tax consequences of farm diversification

Ensure you carefully consider the long-term tax consequences of farm diversification projects before embarking on a new project

There are many ways in which farmers can look to diversify and for those that choose the right options, the benefits can be substantial. 

A study by DEFRA Farm Business in 2017 revealed more than 60 per cent of UK farms had made the decision to diversify, highlighting how many businesses operating in the agricultural sector are looking for new ways to boost income streams.  When undertaking any new business venture, it is always important to look at the possible implications and to do thorough research before making a decision.

What is rural diversification? 

Rural diversification can take shape in a range of different forms.  Properly planned and implemented diversification projects can generate additional income if the project is carefully managed.  There are a wide range of potential opportunities including retail, tourism and renewable energy.

Although diversification can be rewarding, it can also be a complicated process. Ensuring you fully understand the range of implications diversification enterprises create is vital to future-proof your business for the next generation. 

What are the implications of rural diversification? 

Changing the use of land/buildings when diversifying does mean set-up costs, financing and potential planning permission consent costs will be incurred.  A diversification project is also likely to have long-term Inheritance Tax (IHT) and Capital Gains Tax (CGT) consequences that should be considered at the outset. The ownership structure of the assets utilised in the diversification project will need to be considered to ensure the most advantageous IHT/CGT position is achieved. 

In general, the profits earned from most forms of diversification will be taxed in the same way as farming profits. For example, if a farmer is self-employed, they will pay income tax and companies will pay corporation tax. However, there are some other important areas to consider. 

A proportion of diversification projects will require additional staff to run the enterprise, which will increase the National Insurance and pension contributions the business is required to pay. 

There is a risk that by diversifying, business owners will lose Agricultural Property Relief (APR) on the value of assets used in a diversification enterprise.  Consequently, this may result in IHT being payable on the value of the asset in the event of the farmer’s/business owner’s death. 

Capital Gains Tax

CGT is payable when assets are sold for more than their original cost (taking account of capital expenditure incurred since acquisition). If for example a farmer sells assets used within a diversification enterprise, Entrepreneurs’ Relief may be available in order to reduce the CGT rate to 10 per cent on the amount of the taxable gain in value achieved. The specific rules relating to Entrepreneurs’ Relief will need to be met to qualify for this relief.

The structure of the ownership of the assets used within a diversification enterprise need to be carefully considered to ensure the rules relating to Entrepreneurs’ Relief can be satisfied to achieve the most beneficial CGT position for the farmer/business owner.

Inheritance Tax 

Some types of diversification, such as setting up a glamping business or using the land for the grazing of horses, may alter the tax treatment of the land, buildings and farmhouses used within the farming business resulting in IHT relief being denied. 

Any decisions around diversification need to be carefully considered to ensure the long-term viability of the business and to avoid unexpected tax charges falling due. It is important to seek expert advice from an experienced specialist legal advisor, who is able to provide holistic practical guidance and recommend the best solution for each individual business.

Ben Brassington

Agriculture and Estates Solicitor

Aaron & Partners LLP