09 Nov 2018

Farmers not taking tax seriously when diversifying

A survey of 200 farms has found that less than a third of diversified businesses had taken Inheritance Tax (IHT) reliefs into consideration when drawing up their business plans potentially leaving themselves exposed to paying more tax than they need.

Conducted by NFU mutual, the survey highlights a concern for the industry as some types of diversification could alter the tax treatment of land and buildings.

Sean McCann, a chartered financial planner at NFU Mutual, said getting the right structure for the diversified business could help preserve valuable IHT reliefs.

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Agricultural usage

A key requirement in securing Agricultural Property Relief (APR) is that the land and buildings must be occupied for agriculture, so converting farm buildings into workshops, storage units or residential lettings will normally mean that APR is lost.

To qualify for Business Property Relief (BPR) the land or buildings must normally be used for ‘trading’ rather than ‘investment’ purposes, he added.

Diversifications that involve collecting rent with minimal management or provision of services such as holiday lets, are likely to be treated as investments and so are less likely to qualify for BPR.

“Where there is a mix of trading and non-trading activities within one business, it’s important to take advice to maximise the reliefs available,” Mr McCann said.

Depending on the nature and scale of the diversification there could be other tax implications including a risk to Capital Gains Tax relief and potential loss of farmer’s averaging, he added.

Tenancy issues

Farmers with an Agricultural Holdings Act (AHA) tenancy with the potential for succession also need to consider how any potential diversification could affect the chances of the next generation successfully applying for the tenancy.

The successor must pass a number of statutory tests to qualify for the tenancy, one of which is that in five of the previous seven years the applicant’s principle source of livelihood should have derived from agricultural work on the holding.

Non-agricultural income such as from diversification activities on the farm can count towards the income from agricultural work calculation, provided the landlord has given written consent.

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