Clay pigeon shooting, brewing, cheese shops, camping barns, golf driving ranges, renewable power and riding centres – farm diversification comes in many different forms.
Diversification has a crucial role to play in the modern agriculture and rural business sector and is an increasingly likely consideration to future-proof businesses from market and economic changes.
Getting the right structure for the diversified business could help preserve important Inheritance Tax reliefs.
The right advice allows opportunities to maximise the reliefs available when there is a mix of trading activities within the business.
Additional thought must be taken around setting up the new diversified enterprise as a separate entity because of the financial implications of such a move.
Agricultural property can qualify for relief from inheritance tax at 100% or 50%, both on death and in respect of lifetime transfers. This is known as Agricultural Property Relief (APR) which has certain restrictions that should be kept in mind.
For ‘agricultural property’ the definition is agricultural land and pasture. It may include woodlands and buildings used in connection with livestock or fish farming.
A controlling shareholder in a farming company will qualify for Agricultural Property Relief if the agricultural property forms part of the company's assets and part of the value of the shares and securities can be attributed to the agricultural value of the property.
Cottages, farm buildings and farmhouses along with the land occupied by them, may qualify as agricultural property.
In addition, agricultural property must either be farmed by the owner for two years or more or owned by the individual for seven years before and farmed by someone else during that time.
Changes resulting from diversification can alter reliefs that may have previously been in place.
This is a concern as some types of diversification can alter the tax treatment of land and buildings.
As farmers diversify and find different income streams, Agricultural Property Relief may disappear as the land is no longer being used for agricultural purposes. For some activities, Business Property Relief may apply.
If the business activity falls into the category of a rental or investment business, this relief will not be available.
An example of this would be renting out former farm cottages privately to people not working with the business. Depending on the amount of income generated, this could impact on both the APR and BPR available.
The best thing is to seek professional advice in advance of any undertaking to ensure the tax implications are fully understood.
Adapting to market changes and reinvention has always been a way of life for farmers. The signs are that this will continue to be the case; more than a quarter of Scottish farmers plan to diversify to make their farms sustainable post-Brexit, according to the NFU Mutual Diversification Report 2018.
New enterprises often complement the existing business model, drawing upon the existing skills, experience, buildings, machinery, and land capabilities. However, before going down that path, farm owners should always consider the full tax implications of their undertaking.
Hall Morrice has assisted many farming families with diversification, growth or succession planning, including tax-efficient strategies for passing farming assets on to the next generation, helping these operations be tax-efficient and compliant. Contact us for more advice.