With challenges like reducing subsidy and rising costs, farmers in the North east are increasingly looking at other sources of income beyond the traditional uses of the farm. Diversification is an option, but it is worth bearing in mind that a move away from farming may be at the cost of inheritance tax (IHT) reliefs, so it’s important to know how the pros compare against the cons.
Farms usually qualify for agricultural property relief (APR) from 40% IHT, enabling the business to be passed on to family after death, and to continue running without parts having to be sold or burdened with debt to pay a tax bill.
Depending on the type of diversification being considered, there are knock-on impacts to consider. For example, if you diversify into renewables, the land used may no longer qualify for APR unless it is an integral part of the agricultural business - such as providing power for an agricultural activity. It may still qualify for business property relief (BPR) - the alternative relief for businesses –- but not in situations where the land is let out to someone else to put a wind turbine on. A joint venture, on the other hand, may be eligible for BPR.
For woodland, APR only applies if it is considered to be an integral part of the farm, such as shelter belts. It is lost if you go into commercial forestry and grow timber to sell, as that is non-agricultural. BPR may apply instead though.
For the farmhouse, APR again applies, but only if that building is at the centre of farming business and appropriate in size and nature to those operations. Moving all operations to an office in an outbuilding might make sense from a practical perspective, but note that APR on the farmhouse may be lost.
Even if the farmhouse remains the hub of the farm business, there is still a risk of losing APR on the property if you have diversified your business to the extent that most of the activities carried out are non-agricultural in nature. In that type of situation, separate vehicles are an option; one for the farm and house, and one for the other business activities - as long as the house is not then out of proportion to farming operations.
If contractors or other personnel are brought in to help with the running of the farm, APR may be lost on the house unless you are still 'the farmer' and decision-maker - and can provide evidence of this. You would still expect APR on the land.
If you do lose APR because of diversifying away from farming into other activities, BPR is helpful. However, BPR does not apply where the business is wholly or mainly an investment in land. This means that if the diversification tips the balance from mainly farming to mainly letting, such as holiday or residential lets or letting land out to others, BPR will not apply and you won't benefit from any IHT reliefs.
Diversification can cause you to lose relief for your original activities, but there are ways to mitigate this. One approach is that the diversified elements of the business - which have no IHT reliefs - can be structured separately to protect the core relieved activities.
All elements need to be considered before diversification of a farm business happens; commercial opportunity will be uppermost in the mind, but IHT is also an important factor. Careful planning and structuring can go a long way in protecting some of these reliefs.
This article originally appeared in the Press & Journal.