Diversification & tax

PhilipWhitcomb of Moore Blatch examines the issues surrounding diversification for farmers and loss of APR/BPR

It is a truth universally acknowledged that a man is not going to make his fortune from just farming. At least that is what John Doidge, a farmer near Alresford, recently said to me. John is what the man in the street would describe as a typical farmer. He has a small dairy herd, a few hundred acres of land, a mixture of old and new farm buildings and a four bedroomed farmhouse overlooking the Hampshire countryside. He hopes that his son, also called John, will one day take on the family business.

Yet despite this idyllic lifestyle, John is worried about the future. With Brexit (hard or soft) comes uncertainty on future milk prices; whilst the Government has guaranteed the Basic Farm Entitlements to 2020 there is no guarantee that payments will continue after that date and it is not as if his current business is making huge profits to help him through the lean times. So John, like many farmers has decided to diversify. The plan being to convert the old farm buildings into possibly self catering holiday lets or (if he can get planning) modern offices.

This all seems sensible planning to provide an additional source of sustainable income for the future of the farming business, but careful consideration also needs to be given to the tax issues surrounding diversification. In John’s case because of his age (69) and the desire to pass on the business to his son, inheritance tax and the availability of agricultural property relief (APR) and business property relief (BPR).

John naturally assumed that APR would still be available on those farm buildings but this is not the case since they are no longer being occupied for agricultural purposes. Even if John was considering wind turbines and photovoltaic (PV) electricity generating units as a way to increase income the land would no longer qualify under the occupation test.

So, thoughts turn to BPR. Where business assets have been used within a farming business for at least two years before death, BPR at 100% is achievable. However, if John is simply collecting rent each year, with minimal management, provision of services and costs being incurred by him, then it is likely that HMRC will deem this activity as merely rental and so deny the relief.

Working closely with the accountant and lawyer, careful thought needs to take place on the structuring of the activities to ensure that even if APR is lost, BPR will continue to apply. Firstly that there is a genuine trading activity, for example the power generated is being sold to the National Grid. Secondly, whether those PV and turbines are being owned and used within the business or held outside and merely used by the business. The former means 100% BPR is available and the latter only 50%.

Particularly where a farming partnership is involved the position is often murky and unclear as to whether assets are owned by the business or are in fact personal assets of the farmer and are merely used by the partnership. It is important for this to be clarified since the difference in inheritance tax payable can be significant.

Further advice then needs to be taken on whether the assets are incorporated within the business, or (for a partnership) held on separate capital accounts, perhaps in a different ratio to the capital of the main farming business and whether new documentation needs to be drawn up to ensure clarity on ownership and rights.

Finally, where the traditional farming business continues with diversification get advice on whether on balance “in the round” the non-trading elements of the business (holiday lets where little or no additional services are provided) will still qualify for BPR at 100% following the principles laid out in the Farmer & Giles case.

In order for farmers such as John to survive there is often a need for diversification to bring in an additional income stream. However, that change of use may jeopardize the future availability of APR and BPR unless careful planning is done at the same time. With the average age of farmers now in the late 60s there is a ticking time bomb for those who fail to get that advice.