Diversifying the farm or estate can secure a viable business for the next generation. This needs careful planning so your heirs are not burdened with inheritance tax when they inherit.
Agricultural property relief (APR) from inheritance tax (IHT) is available for traditional farming activities. When you diversify away from that agricultural business you lose the APR.
You might for example diversify into retail, leisure, tourism, or renewables.
You may qualify for business property relief (BPR) on the new activities but only so long as you are trading – running a business. If you are letting the land out to another to run their business, you are investing in land and not trading.
This means that generally, (1) if you run a farm shop that is trade, but if you rent out a building so someone else can run a shop that is investing in land, (2) if you run a full service livery that is a trade, but if you rent stables and grazing to horse owners that is investing in land, (3) if you run a hotel from the big house that is a trade, but letting cottages out to holiday makers is investing in land, and (4) letting land for a wind turbine is investing in land, but a joint venture is a trade.
The test is 51% trading and 49% investing in land. HMRC look at where income, profits and capital value come from, where time is spent, and the historical context. This allows 49% diversification without losing IHT reliefs. The risk is that you fall on the wrong side of the 51%/49% test and your heirs are burdened with IHT when you die. The farmhouse can also be at risk of IHT if you diversify to the extent that the house is then out of proportion with the farming activities which are left.
Your heirs may inherit assets they then have to sell, or burden with debt, to pay IHT, and the viability of the business may then be at risk.
There are things you can do to mitigate the tax risk of diversification. The business can be split into two to protect the trading activities from the non-trading activities. This can be taken further and the non-trading activities gifted on. It is important to involve the next generation in the planning because diversification by them after receiving the gift can mean a clawback of the original IHT relief. Insurance could be taken out to pay the IHT bill.
Diversifying the farm or estate can secure a viable business for the next generation. This needs careful planning so your heirs are not burdened with IHT when they inherit.
Please do get in touch if you think we might be able to help.
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