Thinking of starting an ‘Elf Farm’?! – Diversification and inheritance tax in farming

According to the 2016 Defra Farm Business Survey, over 60% of UK farming businesses have diversified. With more business ventures on farms likely in the future it is important to be clear on the impact any changes will have for inheritance tax purposes.

When broadening the business model Agricultural Property Relief (APR) may be lost, but it is still possible that Business Property Relief (BPR) may save the day. However, with the ‘farm stay’ becoming ever popular, farmers need to be alert to HMRC’s interpretation of the BPR rules for holiday lettings.

Taking income from land, including by way of a holiday rental, is characterized as an ‘investment activity’ which will not normally qualify for BPR. In the cases of Pawson (2013) and more recently Graham (2018) the taxpayers argued that the additional services and facilities they provided alongside holiday lettings meant the business was no longer ‘mainly investment’ in nature.

In Graham the holiday apartments located in the Scilly Isles included the provision of croquet lawn, gardens, games room, laundry room, BBQ area and swimming pool. Guests were supplied with flowers, toiletries, cleaning products, basic food items and wine at the start of their stay. The first instance decision was made in favour of the taxpayers and the judgement referred to the ‘personal care’ lavished upon the guests which distinguished it from the other ‘normal’ actively managed holiday lettings.

What is clear from the Graham case is that only an exceptional letting business will qualify for BPR and diversification by farmers into this area should be treated with caution until proper tax advice is sought.

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