What are the tax implications of farming side ventures?

With the added cost pressures on farmers, diversifying income streams on your farm can provide greater financial security.

Whether it’s a café, farm shop or venue hire, farming offers a lot of opportunities to broaden your income streams.

No matter the farm diversification project at hand, there are various tax implications that need to be assessed before projects can start.

Inheritance Tax

Farming property and businesses can be eligible for both Agricultural Property Relief (APR) and Business Property Relief (BPR), allowing a certain value of assets to be transferred tax free.

Individuals are entitled to a pooled allowance of £2.5 million, including both BPR and APR.

Where land or buildings are used for a non-farming enterprise, APR will no longer be available on those assets and you will need to rely on BPR instead. However, if your new enterprise doesn’t qualify, it could be exposed to a significant IHT tax bill of up to 40 per cent.

Tax on profits

Depending on the structure of a business, Income Tax or Corporation Tax will be payable on any profits yielded.

What the business chooses to do with the profits and what rate of tax will be chargeable is important for deciding how the side venture should be structured.

If there are any capital costs that were incurred on developing the new business, these can be offset against profits.

While many people assume costs to repurpose buildings aren’t tax deductible, there is often relief available which can eliminate the tax on profits over the first few years.

Capital Gains Tax

If you are planning to sell or pass on the new enterprise in the long term, it’s important to assess whether Capital Gains Tax (CGT) relief is available.

A business recognised as trading by HMRC may be entitled to Business Asset Disposal Relief (BADR), provided certain conditions are met.

BADR can reduce the rate of CGT on qualifying asset disposals to 18 per cent, up to a lifetime limit of £1 million.

If you intend to pass the asset on, it may be worth doing so before it is developed, as transferring it afterwards could trigger a larger CGT liability.

Speak to an accountant

When choosing to open a new farming enterprise, it is important to speak to a financial expert beforehand.

As the circumstances of each farm are different, we can provide bespoke advice on business structures, IHT exposure and CGT risks.

While diversifying income streams can be an excellent way to keep your farm competitive, it is important for the right tax plans to be in place first.

Considering a new farm enterprise? Speak to our accountants for expert tax advice.