Key tax considerations when exploring diversification

EXPERT VIEW

The government’s Autumn Budget heralds significant tax implications for farmers which must be carefully managed, says Stephanie Dennis.

Diversification can offer many farmers a valuable additional income stream. But careful legal and tax planning is crucial to avoid unexpected costs.

Farmers need to consider how diversification impacts their overall tax position, from Inheritance Tax (IHT) and Income Tax to Capital Gains Tax (CGT). Seeking professional advice at the planning stage is key to ensuring that tax reliefs are not lost.

With over 69% of UK farmers diversifying1, such ventures are becoming commonplace. But what are the specific tax issues farmers need to be aware of and how have the proposed changes announced during the autumn budget impacted this?

IHT and Agricultural Property
Relief (APR)

One of the biggest tax considerations for any farm business is IHT and whether diversification could affect the availability of APR.

APR provides a valuable relief that reduces the tax burden on farm businesses when passing down assets through generations. It is vital for many family farms to continue, especially when it comes to succession planning.

Tax changes announced by the UK Chancellor of the Exchequer, Rachel Reeves, in October will affect farmers who inherit assets above £1m. APR will apply to land and property inherited under £1m, but from April 2026, anything over this threshold will be subject to IHT with a 50% relief applied.

When land or property is taken out of agricultural use for diversification purposes, it’s worth noting that in some circumstances, it may no longer qualify for this relief.

Farms could instead qualify for Business Property Relief (BPR) if the new venture meets specific criteria.

However, with the new proposed changes, the two reliefs will be combined, meaning both will count towards the £1m threshold, which is crucial to consider.

Tax on diversification profits

Another key consideration is Income or Corporation Tax on the profits generated from diversification. The tax payable depends on the structure of the business.

If you’re diversifying using the current farm partnership, income tax will be due on profits. This could push partners into higher tax brackets, so careful planning is essential.

On the other hand, some farmers choose to establish a limited company to manage the diversified business, which could result in a lower tax rate as it would be subject to corporation tax, instead of income tax.

But while there are potential savings, choosing the right business structure requires a thorough understanding of both the tax advantages and the practicalities of managing that structure.

CGT on land and asset sales

Diversification projects that involve selling land or assets, such as converting agricultural buildings into holiday lets or commercial properties, may also trigger CGT.

Any significant increase in the value of these assets since the diversification would likely result in CGT when they’re sold or gifted. Understanding these obligations from the start helps prevent costly surprises.

Recent tax changes have increased CGT, with lower-rate payers seeing an 8% rise and higher-rate payers a 6% rise on the existing rates. Residential property thresholds remain unchanged.

Business Asset Disposal Relief (also known as Entrepreneur’s Relief), often used by farmers to offset CGT liabilities when exiting farming and passing the business to the next generation, will also see a 4% increase, reaching 14% in April 2025.

Planning for the future

One north Bedfordshire farmer, managing around 300 acres of arable land, diversified approximately 10 years ago into a static and touring caravan site, as well as light industrial and commercial letting.

This strategic move aimed to balance the farm business and enhance profitability. The industrial land, which is approximately one acre in size, is now valued in the region of £1.5 million, which cements the significance of diversification in today’s farming landscape.

To ensure legal compliance when making the move to diversify the business, the farmer took legal advice. With the main landowner in his late 80s, careful consideration of IHT liabilities is crucial in this case.

Certain gifts might not fully exit his estate for IHT purposes if he doesn’t survive the seven-year threshold, so we’re constantly reviewing the business model to maximise profitability and ensure the most effective succession planning for future generations.

Stephanie Dennis is a partner at HCR Hewitsons – see www.hcrlaw.com