There is no doubt that farmers continue to face challenging and uncertain times, and it is only right that farmers look at opportunities to diversify. 

Over recent years renewable energy companies have looked for sites to install solar panels and wind turbines, the rules relating to development of agricultural properties have been relaxed, and with a ready market in many areas for holiday lets and bed and breakfast provision, there are a number of opportunities available for alternative uses of farm assets. 

Capital taxes

However, all aspects of any proposal to diversify should be considered before any decision is taken, including personal, commercial and tax considerations.

Farming businesses and agricultural property benefit from generous tax reliefs in respect of income tax, capital gains tax and inheritance tax. Relief is also available in respect of business rates. 

So whilst a barn used in the farming business could qualify for a 10% rate of capital gains tax if it is sold, or could qualify for 100% inheritance tax relief if it is left in your will, a barn that is converted into a rental property could be subject to a 28% rate of capital gains tax if it is sold, or could be subject to a 40% inheritance tax charge if it is left in your will. These risks can potentially be reduced with proper planning.

Similarly, whilst land used for agricultural purposes can qualify for 100% inheritance tax relief, land rented out to a solar park company could lose this relief if the arrangement is not structured and reflected in your accounts in the right way. So, again, proper planning is needed.

VAT

The VAT position in respect of any new activity also needs to be reviewed, as different types of income and the associated expenses can have different treatments for VAT purposes. The VAT position can also be affected by whose name the new activity is run in.

Update your paperwork

Partnership agreements and wills should be reviewed on a regular basis, and certainly in connection with any diversification of activities. It is vital that, as the nature of assets changes, the ownership of the assets is clear, and your future wishes for the assets is understood and reflected in any partnership agreement and in your will.

The message has to be that you should be aware of any potential tax downsides of diversification and whether these may outweigh the commercial benefits or can be avoided. It is therefore vital that proper advice is taken before any decisions are made. 

 

By Nick Smy, Partner. 

For further information on any of the above, please do not hesitate to contact me.