Be in the know about tax implications of farm diversification

Cheese shops, camping barns, golf driving ranges, clay pigeon shooting, brewing, renewable power and riding centres – farm diversification comes in many different guises.

Diversification plays a crucial role in the modern agriculture and rural business sector and has become an increasingly likely consideration to future-proof business from the market and economic changes.

New enterprises often complement the existing business model, drawing upon the existing skills, experience, buildings, machinery, and land capabilities. 

In fact, more than almost a fifth of farmers plan to diversify to make their farms sustainable post-Brexit, according to the NFU Mutual Diversification Report 2018.

Reasons for choosing farm diversification

The headline statistics showed that 60% of farms had already – and there are many reasons why landowners choose farm diversification.

Most commonly it’s chosen to earn extra income (62%); to provide a business opportunity for a partner or family member (26%); or to protect the enterprise for future generations (24%), the same NFU report found.

However, some diversified farm businesses are leaving themselves exposed to paying more tax than they need to because they have failed to consider the inheritance tax implications of their changing business.

The survey found that less than a third of diversified businesses had taken Inheritance Tax (IHT) reliefs into consideration when drawing up their business plans.

Tax implications of rural diversification

Derek Mair, a partner at Aberdeen-based independent accountancy firm Hall Morrice, said that before diversifying, farm owners need to consider the full tax implications of their undertaking. 

He said: “Getting the right structure for the diversified business could help preserve important Inheritance Tax reliefs.

“It is critical to seek advice to maximise the reliefs available when there is a mix of trading activities within the business.”

Additional thought must be taken around setting up the new diversified enterprise as a separate entity because of the financial implications of such a move. 

Agricultural property can qualify for relief from inheritance tax at 100% or 50%, both on death and in respect of lifetime transfers. This is known as Agricultural Property Relief (APR) which has certain restrictions that should be kept in mind.

Agricultural property is defined as agricultural land and pasture. It may include woodlands and buildings used in connection with livestock or fish farming.

A controlling shareholder in a farming company will qualify for Agricultural Property Relief if the agricultural property forms part of the company's assets and part of the value of the shares and securities can be attributed to the agricultural value of the property.

Cottages, farm buildings and farmhouses along with the land occupied by them, may qualify as agricultural property.

In addition, an agricultural property must either be farmed by the owner for two years or more or owned by the individual for seven years before and farmed by someone else during that time.

Seek professional advice before diversification

Derek continues: “Changes resulting from diversification can alter reliefs that may have previously been in place.

“This is a concern as some types of diversification can alter the tax treatment of land and buildings. 

“As farmers diversify and find different income streams, Agricultural Property Relief may disappear as the land is no longer being used for agricultural purposes. For some activities, Business Property Relief may apply.

“If the business activity falls into the category of a rental or investment business, this relief will not be available.

“An example of this would be renting out former farm cottages privately to people not working with the business. Depending on the amount of income generated, this could impact both the APR and BPR available.

"My advice would be to seek professional advice in advance of any undertaking to ensure the tax implications are fully understood. “

Adapting to market changes and reinvention has always been a way of life for farmers.

This will continue to be the case, with changing consumer demand, the weather, and the impact of political policies all playing a part, but regardless, the agricultural sector will continue to be an important part in Scotland’s economy.

Hall Morrice has assisted many farming families with diversification, growth or succession planning, including tax-efficient strategies for passing farming assets on to the next generation, helping these operations be tax-efficient and compliant.

Founded in 1976, Hall Morrice is one of Scotland’s leading independent firms of chartered accountants and has offices in Aberdeen and Fraserburgh. Based at 6 and 7 Queens Terrace in Aberdeen, Hall Morrice can be contacted on 01224 647394 or at accounts@hallmorrice.co.uk

Photo: Derek Mair, partner at Aberdeen-based accountants Hall Morrice, at Drumsleed Farm with farmer Gerald Smith.