An uncertain Brexit future has led to an increasing number of farmers looking to explore alternative ways of supplementing their farm income through diversification. This article explores some of the key factors to consider before committing to a diversification venture.
There are few limitations on the kind of activities you can diversify into, however, you may be restricted to your farm’s physical resources and characteristics. Diversification can be either agricultural, such as;
- Livestock products such as producing and selling sheep cheese
- Opening a farm shop and cafe
- Alternative livestock such as Alpaca or Lama
- Variation in crop produce such as speciality flowers and energy crops
- Renewable energy such as solar or wind farms and battery barns
- Converting barns for storage facilities, to let as offices or for holiday lets
- Farm based tourism, camping and bed and breakfast
- Leisure activities such as motor sport
At its best, diversification should complement the existing farm business, increase profitability and improve cash flow. It is important to note diversification will not work for every farm business and ventures outside the farmers familiar skill set can often detract from and have implications for day to day farming business.
Check title deeds for restrictive covenants, which may prevent certain activities or uses of land or buildings. A diversification project which uses existing farm buildings could require full planning permission for the change of use, which can be costly and the timescales involved can span several months or more.
Impact on the Farms Valuation
Where land and buildings are being developed or converted to accommodate the new venture, there is a possibility this could devalue the farmhouse or farm itself rather than adding value.
Consideration should be given to branding, in particular where there are new products. A good website and social media can also be effective, whilst traditional advertising is useful to make people aware of whats on offer.
Ensuring the right funding is in place and ensuring loan repayments have been budgeted for is essential. Exploring alternative funding options such as grant availability is also advisable and consideration should be given to any loss of subsidies as a result.
Consider the appropriate business structure for the new venture. Should it have its own vehicle and what should that be? Is that as a sole trader, partnership, limited company and how it would fit with the existing farming business?
Care is needed to ensure the correct rate of VAT is applied to all income, for example the supply of crops is normally zero rated, however some fuel crops would be a standard rate supply.
The diversification activities may be exempt from VAT which could restrict the ability to recover input VAT. Partial exemption rules may apply (which are complex)
For a land related supplies you could consider making a formal VAT election known as an ‘option to tax.’ This will convert the supply to standard rated on which VAT will be applied at the usual 20% but allowing recoverability of Input VAT.
Inheritance Tax Relief – IHT
One of the biggest tax advantages of farming is that, upon death, qualifying assets get 100% relief from inheritance tax (IHT)through Agricultural Property Relief (APR).
Diversification can prevent this valuable relief from being applied, although in some cases Business Property Relief (BPR) could be available instead which would give relief between 50% and 100%. The rules in this area are complex and care is needed to ensure conditions are met.
Capital Gains Gain (CGT)
Capital Gains Tax may be payable when you sell/dispose of an asset. A transfer of land and buildings into a separate entity could be deemed a disposal and therefore crystallise a capital gain. There are several reliefs, such as Rollover Relief, Holdover Relief and Entrepreneur’s Relief available, which may be important to investigate when making the decision to diversify. When considering a diversification venture please get in touch with your local Baldwins advisor who will help you assess what the likely tax implications are so you can make an informed decision.