As farmers and landowners are increasingly exploring new and innovative ways of generating income from their land, the tax position may not always be the first consideration. Established diversification types such as farm shops, holiday lets, campsites and commercial lets are being expanded to include many other diverse ventures, such as wellness retreats and various nature-based tourism projects.
Whilst this can bring in welcome extra revenue, there can however be some “tax traps” for the unwary, and there are certain things which could be done to make the new venture more tax efficient.
Will the activity be classed as “trading” for tax?
The first and important question which needs to be considered for every new venture is how will it be viewed for tax purposes. Trading activities generally attract more favourable tax treatment, particularly as regards Inheritance Tax (IHT) and Capital Gains Tax (CGT) – but the distinction between trading and non-trading is not always that straightforward.
A good example to illustrate this was the Vigne tax case in 2017 which looked at whether a livery business should be classed as a trading activity. HMRC’s position was that the income was derived from letting out the land and was therefore just investment income. The representatives of the taxpayer ultimately won the argument by demonstrating that the additional services offered were sufficient to make this livery business more than the mere right to occupy a particular parcel of land.
Why does it matter?
The Vigne case was about IHT and the availability of Business Property Relief (BPR), so the outcome determined whether the land value in question was subject to 40% or 0% IHT on the taxpayer’s death – potentially a very significant difference in tax to pay.
After 5 April 2026, if the assets that qualify for BPR and APR (Agricultural Property Relief), exceed £1m in total, this 0% rate could be 20%, but this is still half the standard IHT rate of 40% – so preserving BPR on assets may become arguably more important, not less, in order to mitigate the loss of tax relief elsewhere.
One important point to note for IHT is that where a business consists of various different activities, such as a farm on which diversified activities take place, the business would generally be assessed for BPR as a whole, in what is known as the “wholly or mainly” test. If, overall, the non-trading activities come to pre-dominate, the valuable IHT reliefs could potentially be lost on assets which would otherwise qualify for BPR. Care should be taken when considering new ventures to avoid tipping the balance.
Depending on future plans for the farm, CGT may also be an important consideration. Again, the rules tend to be more favourable for assets used in a trade, although the definitions are slightly different than for IHT.
The CGT rate for assets that qualify for Business Asset Disposal Relief (BADR) is 14%, so significantly lower than the 24% “standard” rate of CGT.
There are also more ways to defer a gain subject to CGT where the asset has been used in a trade, such a business asset gift holdover relief and rollover relief.
When should this be considered?
The tax position should be considered before any new diversification is undertaken.
In some instances, the position is quite clear, for example, land taken out of agricultural production to be leased to a solar developer would generally move from being a trading asset to an investment asset. Setting up a farm shop would be a new trading enterprise – but what about, for example, dog paddocks, or “pick your own” pumpkin fields, campsites, or barns converted for conference or wedding use? The answer will often come down to what services are offered and how well these services are documented, as illustrated by the Vigne case.
Farm Holiday Cottages
The special tax rules that applied to Furnished Holiday Lets for income tax and CGT were abolished from 6 April 2025, so these properties are now treated for all taxes like any other rental property, so generally non-trading.
However, a farmhouse Bed & Breakfast business would usually be considered a trade.
There is therefore currently a question mark regarding what level of additional services would be needed to be provided to holiday cottage guests to make this a trading activity too, and further guidance is awaited from HMRC. In the meantime, and particularly where the holiday cottages are sited on and integrated within the farming business, it would be worth reviewing the level of services provided to see if the case for classing the activity as trading could be strengthened.
What planning can be done?
The tax position should be reviewed when considering any new diversification so that the impacts are fully understood and, where appropriate, steps can be taken to improve the position.
Sometimes small changes could be made, such as increases to the services offered to move the dial more towards trading. Where those extra services are offered, it is very important that this is fully documented so that evidence could be provided as to their nature, scale and frequency in the event that these were challenged by HMRC.
In some cases it may be appropriate to change the ownership of the asset, maybe by passing it to the next generation whilst it is still being used in a trade and so benefits from some of the more favourable tax treatments.
Even if not, it may be beneficial for the new venture to be carved out into a different enterprise, for example if there is any chance of it threatening the “wholly or mainly” trading status required for the business IHT reliefs. Alternatively, that same rule may be able to be used to obtain IHT relief on assets which would not otherwise qualify.
There is no answer that is right in all circumstances, each situation needs to be looked at individually, but it is important to integrate tax considerations into the decision-making process.
If you want any further detail on any of these points or to discuss your own position and options please contact us at BHP.
