As a farmer in England or Wales, you might already be familiar with Agricultural Property Relief (APR), an important inheritance tax (IHT) relief that can significantly reduce the tax burden on your estate. However, with the growing trend of farm diversification—the practice of adding non-agricultural activities to a farm business—it’s crucial to understand how these changes can impact your eligibility for APR.
At Blackstone Solicitors, we often advise farmers navigating this complex area of law. This article provides a practical overview of APR, the effects of diversification, and steps you can take to ensure your farm activities align with your tax planning goals.
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Understanding Agricultural Property Relief
APR is a valuable relief that applies to the agricultural value of qualifying property when calculating inheritance tax. The relief is either 100% or 50%, depending on the circumstances. Eligible property typically includes:
- Agricultural land and pastures
- Farm buildings, cottages, and farmhouses used in conjunction with the agricultural land
- Woodland and certain buildings occupied for purposes ancillary to agriculture
To qualify, the property must have been owned and used for agricultural purposes for at least two years prior to the owner’s death (or seven years if let to another). Importantly, the relief applies only to the agricultural value of the property, which may differ from its full market value.
The Role of Diversification
Diversification has become a common strategy for farmers to generate additional income and make better use of their land and assets. Examples include:
- Converting barns into holiday lets
- Hosting renewable energy projects, such as solar panels or wind turbines
- Establishing farm shops or cafés
- Offering recreational activities like fishing or glamping
While diversification can be financially rewarding, it can also introduce complications for APR. This is because diversified activities are often classified as commercial rather than agricultural. APR applies exclusively to property used for agricultural purposes, so non-agricultural activities may reduce or eliminate your entitlement to relief on certain assets.
Key Factors to Consider
To understand how diversification might affect your APR eligibility, it’s helpful to focus on these key considerations:
- The Nature of the Activity
The first question to ask is whether the activity qualifies as agricultural. Traditional farming—such as arable farming, livestock rearing, or horticulture—clearly falls within the scope of agriculture. However, non-agricultural activities, such as running a café or letting holiday cottages, do not.
For example, converting a barn into a holiday let changes its use from agricultural to commercial. As a result, the barn may no longer qualify for APR unless specific conditions are met (discussed further below).
- Mixed-Use Properties
If a property is used for both agricultural and non-agricultural purposes, only the portion used for agriculture may qualify for APR. Mixed-use properties require careful planning to ensure that agricultural activities remain predominant, particularly when calculating the agricultural value of the property.
- Farmhouses and Dwellings
Farmhouses are a common area of concern when it comes to APR and diversification. To qualify for relief, a farmhouse must:
- Be of a character appropriate to the agricultural land it serves
- Be occupied for the purpose of agriculture
Diversification can complicate these criteria. For example, if a farmhouse is rented out as a holiday let or used as a commercial office, it may lose its status as an agricultural dwelling and become ineligible for APR.
- Ancillary Uses
Some non-agricultural activities may be treated as ancillary to agriculture, meaning they do not disqualify a property from APR. For example, a farm shop selling primarily home-grown produce might still be considered ancillary to the farming operation. However, if the shop relies heavily on third-party goods, its status could change to commercial, jeopardising APR.
Strategies for Preserving APR
If you are considering diversification or have already diversified your farm activities, there are steps you can take to safeguard your entitlement to APR:
- Review Existing Arrangements
Start by reviewing the current use of your property to identify areas where non-agricultural activities could impact APR. This includes examining leases, business structures, and day-to-day operations.
- Maintain Agricultural Use
Where possible, ensure that agricultural activities remain the primary use of your land and buildings. For example, if you convert a barn for non-agricultural purposes, retain surrounding land for farming to maintain the overall agricultural character of the property.
- Separate Non-Agricultural Activities
Consider separating non-agricultural activities from your main farming business. This might involve forming a separate legal entity, such as a limited company, to manage commercial ventures. While this may not preserve APR for the non-agricultural assets, it can protect relief on the remaining agricultural property.
- Keep Detailed Records
Maintain clear records of how each part of your property is used. This will be invaluable in demonstrating the agricultural nature of your operations to HMRC, particularly in cases involving mixed-use properties or ancillary activities.
- Seek Professional Advice
Given the complexities of APR and diversification, professional advice is essential. A solicitor with expertise in agricultural property law can help you structure your activities to maximise tax efficiency and ensure compliance with HMRC requirements.
Other Tax Considerations
While APR is a key consideration, it is not the only tax relief available to farmers. Business Property Relief (BPR) can also reduce inheritance tax on certain business assets, including those used for non-agricultural activities. In some cases, BPR may provide an alternative route for obtaining relief on diversified assets that do not qualify for APR.
Additionally, income tax, capital gains tax, and VAT implications should be considered when planning diversification projects. Each of these taxes has its own rules and potential reliefs, so a holistic approach to tax planning is essential.
Conclusion
Diversification offers exciting opportunities for farmers to enhance their income and adapt to changing market conditions. However, it also presents challenges for inheritance tax planning, particularly in relation to Agricultural Property Relief. By understanding the rules and taking proactive steps to preserve APR, you can enjoy the benefits of diversification while safeguarding your estate for future generations.
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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