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Tax Planning Considerations for Farm Diversification
Recent reports show that less than 30% of diversified farm businesses have taken Inheritance Tax reliefs into consideration when developing and initiating their business plans.
An NFU survey of over 200 businesses has reported that there is a shortfall in Inheritance Tax (IHT) planning when landowners and farmers are looking at diversification within their businesses, highlighting the fact that these many are not ‘getting the right structure for the diversified business, one that could help preserve valuable IHT reliefs.’
Agricultural Property Relief (APR) is a relief (normally but not always 100%) from Inheritance Tax granted under the Inheritance Tax Act 1984. The relief is available on the agricultural value of a farming property which is transferred either in lifetime (which would constitute a potentially exempt ‘gift’), or upon death. Agricultural property is defined as land or pasture, but also includes woodland and farm buildings that are occupied with and ancillary to the land and pasture, as well as cottages and farmhouses that are of a character appropriate to the land or pasture. A key requirement for securing APR is that land and buildings must be occupied for agriculture. Therefore, converting farm buildings into workshops, storage units or residential lettings will normally mean that the APR is lost.
Business Property Relief (BPR) has a much wider application, i.e. across the whole spectrum of business. It provides relief from IHT on the transfer of relevant business assets, again normally at a rate of 100%. For a business or an interest to qualify, it must normally be used for ‘trading’ rather than ‘investment’ purposes. Therefore, diversifications that involve rent with minimal management or service provision, such as holiday lets, are likely to be treated as investments, thus being significantly less likely to qualify for BPR.
As most diversified farms include a number of trading and non-trading activities within the single business, it is important for landowners and business directors to take professional advice to maximise the available reliefs and taxes due- including Capital Gains Tax relief and potential loss of farmer’s averaging relief.
Where a farmer holds an Agricultural Holdings Act (AHA) tenancy, consideration should be given, and advice sought as to how any diversification may affect the chances of the next generation successfully applying for the tenancy. The person taking over the farm business must qualify for the tenancy by passing a number of statutory tests. One of these requirements is that in 5 of the previous 7 years, the principle source of income for the applicant must have been from agricultural work on the farm. There are some diversification activities that can underpin this work. Again, advice should be sought.
The NFU report continues to report that 20% of the 200 businesses surveyed planned to diversify from solely agricultural work post- Brexit. Of those already diversifying, 25% said that a focus on their non-farming business activities would be prevalent in the coming years. Proposed diversifications included: camping and glamping sites, holiday accommodation and renewable energy schemes. Some 90% of the business owners who had already diversified claimed a positive impact to their non-farming business, and 63% said that diversification was either vital or significant to the financial viability of their farming business.
If you require advice or support regarding farm diversification or planning, please contact James Douglas of King West on 01858 411535 or via email; firstname.lastname@example.org