Farmers tend not to think of themselves as estate owners, however, thanks to diversification, there are striking similarities.
Many in the accounting profession who act for farmers are aware that HMRC is pushing hard to assess farming businesses with diverse activities as investment rather than trading. This distinction relates to inheritance tax and the protection of Business Property Relief (BPR).
While qualifying farming assets qualify for 100% inheritance tax relief through agricultural property relief, diversified businesses now also rely on BPR, which allows for relief at 100% on those non-farming assets such as holiday lets, renewable energy generation, rented cottages etc.
To qualify for BPR, the underlying business has to be one of trading. The Balfour 2009 vs HMRC case created a framework on which to assess farming activity in terms of turnover, profitability, capital values and time spent between trading and non-trading assets.
Addressing these four points, it can easily be argued that in most diversified activities the turnover, capital value and time spent elements would not exceed those of the original farming business. Therefore, farmers are able to tick those boxes.
However, many farmers will find the non-trading or investment element of their business will contribute to more than 50% of the business profit.
Take, for example, a farming businesses involved in agritourism. In addition to the farm, it offers glamping or holiday letting.
Without careful consideration, this “trade” may be deemed to be investment and if it contributes to more than 50% of the profitability of the overall business then HMRC could argue that the farmer is simply renting property, hence investment, and they could lose BPR.
Current recommendations by the Office of Tax Simplification to the Chancellor have indicated that Business Property Relief should be harder to achieve.
The action plan is simple; reassess the farm business. Is it the same as it was 20 years ago?
If the answer is no, then we encourage farmers to address structure, and document time spent in the various aspects of their business estate.
Mark Gibson is a partner with Thomson Cooper Accountants.