Farm diversification has been the big topic of discussion amongst farmers all across the country for the last few years – and it’s easy to see why.

With farming subsidies reduced and government policies constantly changing, not to mention the looming Brexit issue, many farm owners are looking for new ways to make their farm work for them.

Diversification brings with it lots of opportunities for extra income – but also lots of challenges. And like most things with business, tax, and accounting, there’s no simple way of doing things.

Do you need to set up a new business if you plan on diversifying? Well, it all depends on what that diversification is.

The type of farm diversification

Before you can even think about whether you need to set up a new business, you should be absolutely clear on your plans for diversification. The what, the how and the why.

You need to know:

What you’d like your farm to diversify into. Options include:

1. Holiday lets
2. Property rental
3. Workshops
4. Farm shops
5. Land rental
6. Other business activities

How you’re going to achieve that – in terms of logistics, finance, knowledge and expertise

Why you want to diversify and the reasons behind it

It’s also important you understand the marketplace, the potential profits and the impact the changes will have on your core farming activities and your staff.

Once you’ve got all that straight, you can think about the nitty-gritty in terms of accounting and tax requirements. And there are a few essential things you need to consider.

Rentals and Lettings affect your tax relief

One of the most common types of diversification for farms is to convert unused buildings into workshops for businesses or accommodation to rent out – either full time or for holiday lets.

This provides a great source of additional income to the farm.

If this is your choice of diversification, you might not need to set up a separate business, as your farming business can let out the properties itself.

BUT – there are inheritance tax issues in this instance, because you may no longer qualify for Agricultural Property Relief (APR) or Business Property Relief (BPR). These two tax relief policies help farming families minimise inheritance tax, and diversification can greatly affect that.

Some key things to consider:

1. If you rent out land or buildings that aren’t used for agricultural purposes, you won’t qualify for APR
2. If the buildings you rent aren’t used for ‘trading’ purposes, then BPR does not apply
3. Rental properties and holiday lets are typically treated as investment assets rather than trading assets, and so won’t qualify for BPR.

Think about other tax benefits

Depending on the type of diversification, you may be entitled to other tax benefits that could offset the loss of APR or BPR.

For example, if you do decide to rent out some of your buildings for accommodation purposes, you might find that letting them as furnished holiday lets could directly benefit your existing business, and won’t need you to set up a separate business.

That’s because profits from furnished holiday lets (FHLs) are treated as earned income, so they can be used to contribute to your pensions. Capital allowances can also be claimed on applicable furnishings, and they also qualify for certain capital gains reliefs too.

But it’s unlikely furnished holiday lets will qualify for any sort of inheritance tax relief, so this could be a problem. Holiday rent is a taxable supply too, and if it exceeds the VAT registration threshold, you’ll need to register for and start charging VAT. This would impact other farming activities if it’s all one business.

Your individual circumstances and the way you plan to diversify will affect all of these tax nuances, which is why it’s always best to talk to an accountant first.

Structure and ownership can also complicate issues

Farm diversification and new businesses can impact on other inheritance tax and capital tax issues too, especially where there is a mix of trading and non-trading activities.

It all depends on who owns what, how that business is set-up and run, and what will happen to assets in the future. In large farming families, it can often be unclear as to who owns which pieces of land, which buildings and which parts of the businesses.

There’s no easy answer as to what structure is best. Our blog on Managing your farm: sole trader, partnerships or limited company? goes into some of the considerations here.

If you converted a building into a farm shop, for example, it may be worth setting up a separate business for your children to run, but this may also impact BPR and other inheritance tax relief.

The only way to know for sure what’s best for your farm is to speak to an accountancy firm like Brightshire, who understands all the nuances of agricultural tax and can help you plan out all your options.

We have expertise in all types of farm diversification, and we can help you understand exactly which set up and structure is best for you. Suzanne has years of experience in helping farming families maximise their diversification plans, and she can make sure you:

1. Know if you should set up a new business or not
2. Understand all the different tax reliefs you may or may not qualify for
3. Have planned for future tax implications, including inheritance tax
4. Have structured existing and newly diversified businesses in the most tax-efficient way possible

So, before you diversify on your farm, speak to Suzanne about your plans! Call us today on 01270 335030 or get in touch here.