Tax Implications of Farm Diversification: What You Need To Know

Have you thought about adding a wind turbine or putting up glamping tents on your farm? Many family farms explore such diversification to boost income. In fact, about 71% of farm businesses in England have some form of diversification beyond traditional agriculture. New ventures like holiday lets, renewable energy projects, or rental units can provide valuable extra revenue but they also change your farm’s tax profile in significant ways. It is crucial to understand these tax implications upfront to avoid unwelcome surprises and protect your farm’s long term financial health.

Inheritance Tax Reliefs

Agricultural Property Relief (APR) can provide up to 100% relief from inheritance tax (IHT) on the agricultural value of qualifying farmland and buildings up to the, soon to be introduced, new limit of £1 million. However, if you repurpose land or buildings for non farming uses, APR on those assets could be lost. For example, turning a field into a caravan site or solar farm means that land is no longer purely agricultural, so its value may not be protected by APR.

Business Property Relief (BPR) offers up to 100% relief on business assets (up to the new limit of £1 million), but only if the business is mainly trading rather than investment based. This means BPR can cover diversified activities which count as trading businesses, not passive investments. Diversifying into things like property letting or furnished holiday accommodation is typically seen as an “investment” activity rather than a trade, which jeopardises BPR eligibility. Also, if you lease out a field to a utility company for a wind turbine or solar panels, that land would not qualify as a trading asset and therefore no BPR would be available.

Be mindful of the balance of your activities. If diversification tips your farm from “mostly farming” to “mostly letting/rental,” the business could be viewed as mainly an investment business, resulting in the loss of all IHT reliefs on it. Careful planning is needed here. In some cases, farmers segregate new ventures to protect the core farm’s APR/BPR status. The key is to structure things (with professional advice) so you do not accidentally forfeit the very reliefs that help keep a family farm in the family.

VAT Considerations

Many core farming outputs are zero rated for VAT, but diversified income streams are often standard rated at 20%. New ventures like a farm shop, short term holiday lets, or selling electricity from solar panels usually mean adding 20% VAT to your sales invoices, if you are VAT registered. By contrast, some activities (like long term residential lets under an AST) are exempt from VAT. If you have both taxable and exempt income, your business becomes partially exempt for VAT purposes. This triggers complex rules on input VAT recovery. In short, you may only reclaim the portion of VAT on expenses that relates to your “VAT-able” activities. For example, if you continue zero rated farming and also start earning exempt rental income, you will face restrictions on reclaiming VAT for common costs. Partial exemption calculations can be tricky and might leave you with unrecovered VAT, effectively increasing your costs. Planning ahead (or seeking specialist VAT advice) can help manage these impacts – sometimes by allocating costs separately or considering the structuring point below.

Capital Gains Tax (CGT)

Successful diversification can increase the value of your land and assets, which is great until you decide to sell something. Changing farmland to a non agricultural use can significantly boost its market value, and CGT will be due on that increase if/when the land or property is sold. Farmers need to be mindful that a profitable new use today might mean a sizeable CGT bill in the future if the asset is disposed of.

The good news is that if your new venture counts as a trading business, you could benefit from CGT reliefs on a sale. Business Asset Disposal Relief can currently tax qualifying business asset gains at only 14% (18% from April 2026 onward) instead of the main CGT rates. To count as a trading business for CGT purposes, the trading activity must be substantial. HMRC indicates that this equates to 80% considering turnover, profitability, assets and staff time. In addition, other reliefs allow you to defer or reduce CGT in certain cases. If you reinvest the proceeds from selling a business asset into new business assets, you might use roll over relief to defer the gain, and if you gift business assets (for example, transferring land to your children), hold over relief can postpone the tax liability. These CGT reliefs only apply when the assets were used in a trade, so again the nature of your diversified activity (trading vs investment) is crucial. With proper planning, you can restructure or time asset sales to take advantage of these reliefs and minimise any CGT hit.

Structuring Diversifications

How you structure a new venture can make a big difference to your tax outcome. One approach is to run the project within your existing farm business as just another activity. This keeps things simpler administratively (one set of accounts, one tax return). However, there are trade offs. All the venture’s income will be lumped into your farm’s overall trading results for tax, which means if your farm is VAT registered, the new venture’s sales will also be subject to VAT. You will also be mixing the venture into the same business for IHT purposes. That could be risky if the new activity is investment like (e.g. cottage rentals) and might threaten your farm’s APR or BPR status when combined with the farming operation.

Alternatively, you can set up a separate business entity (such as a limited company or a second partnership/ sole trade) for the new venture. Keeping it separate can ring fence the activity so it doesn’t jeopardise your main farm’s tax reliefs. It also offers flexibility with VAT and at its turnover level, it may not be required to mandatory register for VAT, but this may increase your outgoings.

Summary

Farm diversification offers exciting opportunities for new income and greater resilience, especially for family farms looking to future proof their business. But it does bring a tangle

of tax implications. The key is proactive planning. Do not let tax considerations deter you from diversifying, just make them part of your decision process.