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The Thorny Issue of Agricultural Diversification
It is no surprise that the farming community is becoming more and more attuned to the attractions of diversification.
Many farmers and landowners have sought to maximise on the commerciality of their land and have embraced various opportunities. Many have converted under-used or redundant farm buildings, including barns and storage facilities, to provide residential holiday or commercial/business lets, some with considerable success. Other new projects include children's nurseries, small office developments, farm shops, units for storage and warehousing and riding liveries and schools. Other key projects include wind farm developments, commercial fishing lakes and mineral exploitation and landfill.
Potential pitfalls arise when owners of agricultural land choose to go down the diversification route. Some changes can prejudice the farmer's entitlement to Business or Agricultural Property Relief for Inheritance Tax (IHT) purposes. Altering the status of the use from agricultural to, e.g. equine can affect the farmer's entitlement to these very valuable IHT Reliefs.
The principal condition for securing Agricultural Property Relief is that the land must meet the IHT definition of 'agricultural property' and be used for agricultural purposes. Farmers and land owners who decide to change the use of their land for an alternative commercial use run the risk of losing Agricultural Property Relief and thus becoming subject to Inheritance Tax unless they can still qualify for Business Property Relief. It is crucial to seek legal advice before implementing agricultural diversification.
Another important condition relates to the period of ownership and occupation. In general terms, owner occupiers who are trading can secure maximum reliefs after two years - otherwise a seven year period of ownership is necessary.
The rules relating to Agricultural and Business Property Reliefs are complex and professional advice should always be sought.
Agricultural diversification schemes provide a welcome and crucial income stream to supplement that generated by the traditional farm business, but there are possible tax problems, so care is needed.
Challenged by the threats of lower dairy prices and higher feed prices (to say nothing of the weather and its threat on yields) taken with the Eurozone problems many continue to look for new commercial opportunities.
In summary, the issue of land diversification can be a thorny one. The crucial point to remember is the need to seek sound legal and accountancy advice before implementing any diversification scheme. Agricultural and Business Property Reliefs can be retained, but careful planning is often crucial.
Anne Elliott is a Partner and agricultural law specialist at Latimer Hinks Solicitors. Anne is a member of the Agricultural Law Association as well as a Recommended Professional for the Tenant Farmers Association. In 2011, she was cited in the prestigious Legal 500 Directory for both her work on inheritance tax and in the areas of agriculture and estates. This was followed by a recommendation in Chambers 2012 for her expertise concerning, among other areas of law, the Agricultural Holding Act. Latimer Hinks has a team of around 50 people serving private and corporate clients.
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Please note: This article is intended as guidance only. No responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by Latimer Hinks. In addition, no responsibility for loss occasioned/costs arising as a result of any act/failure to act on the basis of this article can be accepted by the firm.