In recent years, we’ve seen a shift in the agricultural market which has required farmers to be more agile in their approach to business. From the new trade deal with Australia raising questions over the future of British beef, to the increased demand for organic, local produce – many farmers have looked to diversify their operations in order to meet the needs of the market.
What’s more, diversification is also becoming a popular tool to unlock additional revenue streams and help futureproof the success of the farm. We’ve seen farms open private fishing lakes, maximise under used resources by renovating old barns into holiday lets, and even repurpose open space for commercial woodland.
While a new venture might sound exciting, there are important considerations to make when it comes to the farm’s future that can have a significant impact on the next generation.
Inheritance tax implications
While diversification projects may lead to increased income, future tax planning implications must be taken into consideration.
Many farms benefit from Agricultural Property Relief (APR) and Business Property Relief (BPR), which can reduce or eliminate Inheritance Tax (IHT). To secure APR, the land or buildings must be occupied for agricultural purposes and, in the case of BPR, they must be used for trading rather than investment purposes.
One of the most common methods of diversification is to utilise property for holiday letting. Holiday lets are a quick way to make money from surplus areas of land which can be easily converted and put on the market. However, holiday lets can be problematic when it comes to IHT reliefs as they may be viewed as an investment and therefore would not qualify for BPR or indeed APR, resulting in the 100 per cent tax relief no longer being available. Careful planning prior to commencement may assist in preserving the reliefs available and mitigating the potential large IHT bill.
Making changes to create other revenue streams can alter eligibility and can potentially result in more tax being accounted for upon death.
Diversification can play a big part in planning for the farm’s future ownership and help support the smooth transition to the next generation. Having a succession plan in place that clearly states how you wish the farm to be run on a day to day basis in the future can help to ensure your hard earned work continues to thrive.
Before diversifying, it is important to discuss any changes with those family members or relatives who you would like to succeed in running the farm. An open dialogue will ensure they are onboard with any decisions you take and getting their input as early as possible will help reduce any potential conflicts further down the line.
Giving away aspects of the farm to the next generation, either outright or by way of a trust, can be another way to navigate through any inheritance tax pitfalls. This would increase the estate value for the younger generation rather than the senior and allow them to benefit from the profits now. They are likely to have the energy and enthusiasm to run a project on the farm and give them valuable experience of business management.
However, you will need to survive seven years from the date of the gift to avoid the value of the land gifted forming part of your estate for IHT purposes.
Restructuring the business
When considering diversification, it may be appropriate to sperate the diversified elements of the business so that they are treated as separate entities. This maybe a helpful way to overcome issues when working out if assests are entitled to APR or BPR. This can also be useful if after diversification a farmer would prefer the different elements of the business to be run differently or by different people.
Planning for if something goes wrong
While it is vital to consider how making changes may affect your farm, business and family in the long term, it’s important to consider the impact diversification can have now too. We’ve all had great ideas that have not gone quite to plan and being aware of all the risks involved when making changes will ensure that if things take an unexpected turn you are prepared and ready to adapt.
Researching local demand and gaps in the market will also help ensure the diversification planned will succeed as it will be providing a resource that people really want and feel they need so in turn generating greater security for the business.
The bigger picture
When deciding whether or not to diversify it’s vital to think about the bigger picture. What do you really want to achieve and how do you want to get there? Having plans in place for all elements of diversification and the business will help ensure that what can sometimes be quite a challenging process, runs more smoothly. Plans will also help in the short and long term so that all involved are on the same page and aware of what is achievable so that you can future proof your business for future generations.