With farming subsidies reduced and government policies constantly changing, many farm owners are looking for new ways to make their farm work for them.
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:
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
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
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:
If you rent out land or buildings that aren’t used for agricultural purposes, you won’t qualify for APR
If the buildings you rent aren’t used for ‘trading’ purposes, then BPR does not apply
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:
Know if you should set up a new business or not
Understand all the different tax reliefs you may or may not qualify for
Have planned for future tax implications, including inheritance tax
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.
The only way to know for sure what’s best for your farm is to speak to an accountancy firm”