Shropshire Farming Talk: Understand your potential tax position before diversifying

 With over 69 per cent of UK farmers choosing to diversify their farm business, it’s an opportunity that is becoming the norm. 

However, Stephanie Dennis, partner at HCR Law, says that while additional income streams are beneficial, legal advice should be sought before diversifying to minimise potential tax implications.

“Diversification can affect the amount of tax you pay and some of the reliefs available to those involved in agriculture,” explains Mrs Dennis. 

“We therefore recommend that anyone considering diversification seeks legal advice first as careful planning is required to avoid hefty tax bills,” she adds. 

Mrs Dennis says that diversification covers a wide array of activities and it’s not always a one size fits all approach.

“The tax implications will vary between farm businesses but the three main taxes to be aware of are inheritance tax (IHT), income tax, and capital gains tax (CGT).”

Inheritance tax (IHT)

When a decision is made to remove land or property from agricultural use for diversification purposes, it may no longer qualify for Agricultural Property Relief (APR).

“APR is a valuable tax relief that can help reduce large IHT burdens on farm businesses when someone in the family passes.

“For some businesses, the availability of APR is the difference between continuing the family business and not,” Mrs Dennis adds.

For many diversification projects, land or buildings may need to be removed from agricultural use. Some ventures might qualify for Business Property Relief (BPR), but this requires meeting specific criteria, making it essential to consult a solicitor about the new business's nature.

"However, the additional income from diversification could make the project worthwhile, and therefore, succession planning and considering your IHT position is something which cannot be overlooked,” says Mrs Dennis.

Tax due on profits

Where turnover is being generated, tax will be due on this income.

“Whether this tax will be income tax or corporation tax depends on the legal structure of the diversified business,” explains Mrs Dennis.

“Often, farm partnerships will diversify within the current partnership to mitigate risk or improve cash flow.

“In this instance, income tax would be payable, and depending on the current income of the partners, this could tip them over the threshold for becoming higher or additional rate taxpayers.”

Mrs Dennis explains that some farmers opt for a different business structure, such as a limited company, to reduce tax liability. 

"Corporation tax applies in this case and is charged at a lower rate, resulting in less tax on the business's revenue," she says.

"However, while a limited company may offer tax advantages, other factors must be considered to ensure it's the right structure for your diversified business."

Capital Gains Tax (CGT) 

Mrs Dennis explains that CGT can be triggered when land or assets are sold following diversification.

“Where land or assets have increased in value and are sold, there will usually be CGT payable on the disposal of these assets.

“For example, if an agricultural barn is converted into a commercial holiday let and later sold, CGT will be payable as the barn has increased in value due to the diversification.”

While there are various exemptions and reliefs available to help minimise the burden of CGT, Mrs Dennis says it’s a complex field to navigate and requires professional advice to ensure the best outcome for your business.

Mrs Dennis adds: “The various routes of diversification available to UK farms offer ample opportunities to keep family farms thriving. However, understanding the tax complexities is essential to ensure you are diversifying into a profitable and successful venture."

Mrs Dennis explains the tax changes announced in the October autumn budget will change the availability of APR to farming families.

“What was once available in its truest form to all farms, will now only be available at 100 per cent for up to assets of £1m, and anything over and above this will benefit from the relief at a reduced rate of 50 per cent,” she says.

She adds that the changes to IHT may encourage farming families to consider gifting land however they should be aware that any gifts made after 30 October 2024 will still potentially fall within the £1m threshold if the giftor dies within 7 years of making the gift. 

To add a further complication, CGT rates have increased for non-residential property, from 20 per cent to 24 per cent, making it more difficult for farming families to pass down land and assets without being faced with large tax bills.