Several key factors are driving the increasing diversification of activities on farms and rural estates. These include Brexit-related risks such as cheaper food imports and changes to available subsidies; the continuing volatility and unpredictability of traditional weather patterns as a result of climate change; and shifting consumer behaviour, such as the rise of staycations driven by the COVID-19 pandemic and an increased focus on mental health and ‘environmental wellness’.

Popular forms of diversification include utilising existing agricultural land to generate renewable energy (e.g. the installation of solar panels), establishing caravan parks or camping/glamping sites, and increasing retail revenue by opening farm shops, organising festivals and even transforming farmland into dog exercise parks!

Impact of diversification on inheritance tax

While diversification is generally regarded as a sensible form of long-term financial planning, these changes may have a detrimental impact on your existing inheritance tax position and the availability of valuable inheritance tax reliefs, in particular agricultural relief (AR) and business relief (BR).

Agricultural relief

Generally speaking, AR is available at either 100% or 50% on the agricultural value of any land, property or assets used for, or in conjunction with, agriculture. This can include farmland, barns and storage facilities, agricultural machinery, farmhouses and farm cottages. When determining the availability of AR, HMRC will look at the different uses of the land or property and the way it is used and occupied.

Diversification from agricultural to non-agricultural use carries an inherent risk that the land or property in question will no longer qualify for AR and becomes taxable for inheritance tax purposes. For example, if you converted existing agricultural land or buildings into holiday lets or camping/glamping sites, these assets would no longer benefit from AR. It is also important to be aware that diversification by a tenant of your land and/or property away from its existing agricultural use may also affect your eligibility for AR.

Business relief

In the context of diversified farms and estates, BR becomes increasingly important. Where there is a mixture of farming and other diversified businesses and assets (such as rented cottages) owners must rely on the availability of BR to mitigate their inheritance tax exposure or face an increased inheritance tax liability.

BR is generally available on a business/share of a business or assets used in conjunction with the operation of a business, provided that the business or assets have been owned for at least two years before death.

However, the legislation draws a sharp distinction between the availability of BR for so-called ‘trading’ and ‘investment’ businesses. A ‘trading’ business is a business where the majority of its activities are considered trading activities and ‘investment’ businesses likewise. Trading activities include the manufacture and/or sale of goods whereas investment activities include the acquisition or holding of investments including land, securities and other assets to generate income. Only ‘trading’ businesses will qualify for BR and this is determined by HMRC on the basis of an all or nothing test looking at, among other things, where income, profits and capital value come from.

For example, converting existing farmland or buildings into holiday lets or camping/glamping sites is a common form of diversification in popular tourist areas. However, these types of businesses may be problematic for inheritance tax purposes because they are no longer ‘agricultural’ and therefore lose AR. For BR purposes, HMRC deem the receipt of rents as income generated from an underlying investment asset (i.e. the land) and therefore it will consider the business as comprising mainly ‘investment’ rather than ‘trading’ activities so neither is BR available. This is the case even where ancillary services are also provided as part of the business (e.g. cleaning services) unless the services are considered ‘exceptional’.

However, where a farm or estate has diversified and comprises a mixture of farming and other assets, a claim may be made for BR at 100% on the whole farm or estate on the basis that, when viewed as a whole, the business is “wholly or mainly trading”. Currently, this is generally considered to be a 51:49 test. It would always be prudent to ensure that the split between an estate’s trading and investment activities does not sit close to that tipping point, particularly given the recent report on IHT by the Office of Tax Simplification in which an 80:20 test was suggested, in line with the trading v investment split associated with capital gains tax legislation.

In principle and subject to the caveat above, HMRC’s approach allows 49% diversification without losing the availability of BR but there is the risk that if you fall on the wrong side of the test, valuable inheritance tax reliefs are lost and you may burden your estate with a hefty tax bill which may in turn have significant ramifications for the future of the farm or estate business.

The importance of conducting regular reviews and rebalancing of a farm or estate’s business model and diversified components to ensure that the balance is not tipped from a trading business to an investment cannot be overstated. We would always recommend regular discussions and particularly when any new (diversified) business on the farm or estate is contemplated, between your accountants, solicitors and land agent to ensure that the “Balfour” balance (so called, following a famous tax case relating to the Earl of Balfour) is always on the right side of the trading/investment scales.

The position can also be particularly complex where partnerships are involved as it may be unclear for tax purposes whether assets are owned by the business (in which case relief is available at 100%) or personally by one or more of the partners (in which case relief is restricted to 50%). In the case of partnership assets, further advice may need to be taken on whether the assets are held on separate capital accounts, perhaps in a different ratio to the capital of the main business and, as such, whether new documentation needs to be drawn up to ensure clarity on ownership and rights. Any changes to ownership of assets within the partnership may also have CGT and SDLT consequences so any proposed changes must always be considered in the context of succession planning generally.

Further considerations

While diversification may impact your existing inheritance tax position, it is only one of a number of important considerations you should take into account when deciding whether to diversify your existing activities. Further considerations include: (i) in the case of land, whether you have adequate rights or whether there are restrictions which may impact your intended use of the land; (ii) ensuring that you have in place sufficient local authority consents (e.g. planning permission) to undertake such activities; and (iii) how any new activities may be funded, such as from existing capital or whether external financing options will need to be considered.

It is also important that you review your existing Will to ensure that your personal and business assets are distributed in accordance with your intended wishes following your death and that Lasting Powers of Attorney (LPAs) are in place so that the farm and diversified businesses can continue to operate should you lost mental capacity.


In summary, diversification is becoming an increasingly important way of generating additional revenue for farmers and estate owners alike in order to ensure the continued viability of the farm or estate business but it is crucial to pay due consideration to the impact that any such changes may have on your existing inheritance tax position and succession planning.

Birketts are well placed to advise you on the most appropriate arrangements depending on your individual circumstances.

For further assistance or advice please contact a member of Birketts’ Private Client Advisory Team.

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