07 Nov 2023

Don’t forget tax implications when looking to diversify

Income streams for farmers

With ever-present volatility in market prices, interest rates rising and basic payment scheme (BPS) reductions becoming more noticeable each year, farmers are increasingly looking at ways to create more stable income streams to support the rest of the business and ensure that cashflow requirements can be met.

Diversification has been popular in the industry for some time now and is an attractive option for those looking to generate extra cash, but whilst it can be good for spreading business risk, it is important to ensure that longer-term tax implications are not ignored.

Agricultural property relief (APR) gives relief from inheritance tax (IHT), usually at 100%, on the agricultural value of land and buildings used for the purpose of agriculture. Where assets are moved into non-agricultural use, as often happens when diversifying, APR will no longer apply, meaning these assets could fall into charge of inheritance tax.

However, such assets may still be covered by business property relief (BPR) provided they form part of a trading business. BPR is another IHT relief, available at 50% or 100%, and can be useful for farmers as it covers additional value above just the agricultural value of property (such as development value) and other business assets, such as machinery or business goodwill.

BPR is available for most businesses, but it is critical that the business meets HMRC’s definition of ‘trading’. For IHT purposes, the business needs to be ‘wholly or mainly’ trading (generally considered to be more than 50%), rather than ‘wholly or mainly’ an investment business.

Assessing the trading status of a business is likely to be subjective and HMRC will view the business in the round, but to help this they consider three tests which look at activities, assets and sources of income. Where they consider the business to be mainly trading, 100% of the business will qualify for BPR relief, whereas if they consider the business to be mainly investment, no BPR will be available at all. When diversifying, it is therefore crucial to keep in mind the overall balance of the business as the tax implications if BPR is lost can be considerable.

The diversification which most often causes problems is the letting of property, as this is an investment activity. It is not uncommon for businesses to let out surplus land or buildings and where the income from this is modest, there should be no IHT implications. However, if this grows it could easily generate more than 50% of a business’s income. In such situations, it is key that other aspects of the business, such as assets and activities, are more heavily geared towards trading activities to support a future BPR claim.

Reviewing business structures to ensure that reliefs from inheritance tax are maximised can also be useful where diversification activities are undertaken. There may be opportunities to bring investment assets into a trading business to benefit from BPR, or conversely it may be favourable to split investment assets out if this might allow the remaining business to be BPR qualifying. Where BPR relief is likely to be lost, it may be possible to gift assets during lifetime to avoid an IHT charge. A capital gains tax charge could result
from such gifts, but reliefs may also be available to mitigate this.

Diversification can present big opportunities for those looking to generate more regular cashflows or spread their risk, but the effects of changing asset use on inheritance tax reliefs should be a consideration factor. There are likely to be options available to meet the needs of both the business and the individuals involved, but early planning can help to preserve assets for future generations and avoid unexpected tax bills later on.

Get in touch

Related insights

Three people in business attire are seated at a desk in an office, reviewing a document together. The person on the left is pointing at the document while the other two look on attentively.

How a members voluntary liquidation fits into succession and exit planning

14 October 2025

Read
Rob Gear, corporate finance partner at PKF Francis Clark

Rob Gear promoted to partner in our corporate finance team

1 October 2025

Read

A summary guide to agricultural property relief (APR)

29 September 2025

Read
path leading to farm

Landwise: farming and estates magazine

24 September 2025

Read
A man is looking at his accounts on a computer screen.

Making Tax Digital for Income Tax: All you need to know

24 September 2025

Read
A group of six people in a modern office setting having a meeting around a glass conference table. One person is standing and speaking, while the others are seated and listening attentively.

When and how to prepare for a business exit

23 September 2025

Read
A family business owner with his two adult sons. The man has his arms around his two adult sons who are holding a pint of cider each. They are all smiling and chatting. The setting is in a brewery.

Succession planning tips for family businesses

17 September 2025

Read
A female construction worker if safety gear stands on scaffolding, smiling as she holds on to to a metal bar.

Construction industry scheme and IR35: are you compliant or at risk?

17 September 2025

Read
business people sit around a table and one, a man stands talking, they are in a modern office and all wearing smart suits

Corporate criminal offence (CCO): As enforcement activity ramps up, is your business ready?

16 September 2025

Read

Will planning ahead of APR / BPR changes: Understanding the tax implications

15 September 2025

Read
The full PKF Francis Clark accounting and tax trainee intake

Welcome to our latest accountancy and tax trainees

10 September 2025

Read
Two colleagues deep in thought discussing what they see on a laptop

Understanding PAYE settlement agreements

10 September 2025

Read