Farming Diversification Tax
Now the Basic Payment is set to dwindle, many farming families are exploring ways to use their land to generate new sources of income and engage younger generations who could have fresh ideas to secure their long-term financial stability. Farmers have come up with many ingenious opportunities to diversify. Renting unused space, farm shops, dog fields, holiday accommodation, hosting weddings or other events, livery and renewable energy are just some ideas.
Before taking this step, it is worthwhile considering the tax implications to ensure your venture does not result in your family having an unwelcome tax liability in the future.
Inheritance Tax (IHT)
Agricultural Property Relief (APR)
Many farmers’ estates will benefit from Agricultural Property Relief (APR) when that time comes. APR can reduce or even completely eliminate IHT on farmland and buildings. As with all tax reliefs there are qualifying criteria which need to be met. A broad outline of the requirement is that the land or buildings must be occupied and used for the purpose of agriculture. The relief can be applied to farmland and barns, the agricultural value of farmhouses and some farm cottages. We need to look at the ownership of the land and property and how it is used and occupied.
If diversification means a change in use from agricultural to non-agricultural use, the asset will no longer qualify for APR and, in the absence of any other relief, would be subject to IHT.
Examples would be holiday lets or camping and glamping fields. As these are not used for the purpose of agriculture, APR would be denied. If you are a landlord, you also need to consider diversification by tenants which could also adversely affect your own eligibility of APR.
Business Property Relief (BPR)
The assets used in some diversification projects might qualify for Business Property Relief (BPR), which can also reduce or eliminate IHT. To qualify for the relief, assets must be used for trading rather than investment purposes. Any assets generating rental income, in the absence of substantial amounts of management by the owner or extra services over and above what a landlord usually provides, are likely to be considered as investments resulting in them not qualifying for BPR.
A very common diversification project is the creation of a holiday let. If the level of additional services provided is especially high, then HMRC may accept the business as being one of ‘trading’ rather than ‘investment’. Various cases have been heard in the tax tribunals and it is impossible to give a blanket answer to what level of service needs to be provided to make the all-important difference. Each case must be treated on its own facts, but the bar is quite high.
Capital Gains Tax
If you are considering gifting land or buildings to a younger member of the family so they can create their own project, you need to plan this carefully as a Capital Gains Tax liability might be triggered.
This is because where gifts are made between connected people (such as family members), Capital Gains Tax will be due based on market value. The actual price paid, if any, is ignored if the transfer is between connected people. It may be possible to defer any Capital Gains Tax on gifts by claiming Gift Holdover relief. You do not pay Capital Gains Tax when you give away the assets, but the recipient pays any tax when they sell or dispose of the asset.
Business Asset Disposal Relief reduces the tax payable to just 10% on the gain if the relevant qualifying criteria are met. However, you need to be disposing all or part of your business, not just an asset used in the business. There are other criteria about timing and ownership which you would need to meet to qualify.
Rollover Relief allows taxpayers to delay paying Capital Gains Tax if they sell or dispose of business assets and use all or part of the proceeds to buy new business assets. The tax will be due when the new asset is sold.
The rules can be complex so please do speak to us about your ideas.
Farmers need to be aware that diversification can have significant implications for VAT.
Many new income streams will be subject to VAT, either standard rated (20%), reduced rated (5%) or zero rated (0%). Other income streams might even be exempt from VAT.
This can be a little bit of a minefield and can cause problems. For example, if a farmer lets out land which does not have an Option to Tax on it (exempt supply) this can result in some VAT incurred being irrecoverable. This is because you would be a partially exempt trader. This is not a consideration with the Basic Payment and farming subsidies which are outside the scope of VAT altogether so do not affect VAT recovery.
Where a farmer lets out holiday accommodation (standard rated supply) VAT would need to be paid over to HMRC on the income. Sometimes it might be advantageous to set up a diversification project in different ownership to the farm so that it could be run without being VAT registered. VAT is attached to the legal entity owning the business, rather than the business itself. However, care needs to be taken that this would not be seen as artificial separation of two businesses by HMRC.
We are here to help
If you are considering diversifying, please speak to us for advice. All farms and farming families are different, with each one having their own ideas and dynamics. Where diversification is concerned our advice can never be that one size fits all. Please speak to us.