Farmers are constantly considering ways to diversify. As the margins on agricultural produce continue to be squeezed, alternative income streams need to be considered. Many farmers have therefore gone down the route of opening farm shops.
In our region, farm shops are very popular; to shoppers and tourists they provide a good source of gifts and fine foods to be enjoyed; to farmers, they are a valuable way to supplement their farming income and provide diversification.
To a “tax lawyer”, however, they provide a worry. When advising agricultural clients, we need to consider the agri-business as a whole when looking at tax reliefs. To be considered particularly is the applicability of Inheritance Tax (IHT) reliefs. Specifically, would Agricultural Property Relief (APR) or Business Property Relief (BPR) apply? If not, then the farm shop could produce a large tax bill when the owner dies.
Briefly, APR applies to agricultural property which has been owned and occupied for the requisite period of time and can operate at either 100% or 50%. The utopia when dealing with a farm owned on death is for the entire property to be eligible for APR at a rate of 100% making it effectively “tax free”.
Most farmers are aware of the many pitfalls which surround claiming APR on the farmhouse but may not be aware that diversification can also result in a loss of relief.
A farm shop may not qualify for APR. If the shop building had previously been a barn or store for farm equipment it is likely that relief at 100% would have been available. If the building was surplus to requirement or derelict it would not qualify for APR.
A derelict building may be converted to a shop which increases its value and productivity. To qualify for APR, the shop must be used for agricultural purposes. Simply selling fruit, veg and meat may not be an agricultural purpose. To qualify, the farmer must be selling predominantly his own produce. This would then be an agricultural purpose and as such relief at 100% may be available.
Conversely, if the farmer buys in produce to sell this is not an agricultural purpose. That said, BPR may apply but that would depend upon other aspects of the farming business and in particular the ownership of the shop and who is trading from it.
In life, therefore a farmer may reap the rewards of a busy farm shop, but after their death, an unexpected tax bill could be payable if the farmer has not managed their affairs properly and reviewed all the activities on his farm with a tax expert. Farm shops are not the only concern; other forms of diversification can also impact on tax reliefs. At Hay & Kilner, we are happy to advise farmers and landowners on the reliefs available to them and provide practical advice on the way forward to secure maximum reliefs.
For further information, please contact Alison Hall, Partner at Hay & Kilner
Call: 0191 232 8345