Managing tax reliefs around farm business diversification

Rachael Leathley
Associate, Private Client

Diversification is a regular topic of conversation for us with our farming clients as they look to keep up with the costs of running their businesses and utilise the different environmental subsidies that are available.

We have seen a particular increase of late in enquiries about the implications and opportunities of locating renewable energy technologies on farmland, especially in relation to solar energy schemes.

Solar farms certainly provide potential for farm businesses to secure a useful additional income stream. As well as this, they would be able to generate their own renewable energy to reduce their carbon footprint. A brief look through the pages of your local newspaper will reveal how many landowners are now reaching agreements with renewable energy developers that want to make use of farmers’ land.

However, as with any business diversification, it is important to weigh up the benefits against the potential pitfalls, including the Inheritance Tax consequences of diversification when the owner of a farm business passes away.

For the purposes of lifetime planning, one of the main considerations when a farmer is looking to diversify their business is whether or not Agricultural Property Relief (APR) will still be available on their death.

APR is an important consideration for farmers as it can reduce the liability to Inheritance Tax on agricultural assets to zero.

In order to claim it, you must own and occupy your land for agricultural purposes for at least two years. If you are not farming in hand, you must have owned the land for seven years and someone else must have been in occupation for agricultural purposes during that period.

There is an argument to say that land taken under a Lease to a renewable energy company for a solar farm is no longer being used for agricultural purposes and therefore APR may be lost.

Farmers therefore need to undertake careful planning and get clear professional advice to ensure diversification into renewable energy does not result in a large Inheritance Tax bill for future generations.

Where APR is not available, it may still be possible to obtain Business Property Relief (BPR) on land used for renewable energy.

BPR is available on the value of an asset used in a trading business and owned for at least two years before your death. It is available at a rate of 100% for assets held in a trading business, while the rate is reduced to 50% where assets are held by an individual or trust and used by a business.

To obtain BPR, it makes sense to get professional advice about the structure of your business and how business assets are held, so that you know for sure where you stand.

It is also important to note that BPR is only available on the value of an asset used by a trading business, in contrast to assets which are used in a business which is wholly or mainly “a holding investment”.

The renting of land can constitute a holding investment so, if you are mainly renting your land to energy companies and this becomes the business’s main income stream, it may well be that BPR is denied on the farmer’s death, despite any trading farm activities that are ongoing.

Diversification is an important part of any business’s ability to manage economic risk and maintain profitability. When planning the future of your farm business, it is essential that you consider how its structure may impact on future generations’ finances.

For further information, please get in touch with Rachael.