Thomas Westcott is warning its farming clients looking for new income streams post-Brexit that they could be penalised for changing the use of farm land or buildings.

With more farmers expected to diversify following the UK’s exit from the EU, the firm warns that many could lose Agricultural Property Relief, which provides relief from inheritance tax.

If the agricultural property is land or pasture that is used to grow crops or rear animals intensively, then it will qualify for APR. However, changing the use of farm land or buildings could mean APR no longer applies.

Partner Vanessa Parnell, who is based in the firm’s Holsworthy office, said: “With the agricultural sector facing potentially significant changes following Brexit, we expect growing numbers of our farming clients to diversify.

“Here in the South West, tourism is an obvious revenue stream for farmers to tap into so we anticipate more agricultural buildings being converted into holiday lets. Other farmers may seek to adapt some of their land for renewable energy projects, for example.

“As farms seek to develop new revenue streams, it is crucial that they are not penalised by inheritance tax rules. If you are changing the use of land or a farm building, it is important to seek expert advice to establish whether or not the property will qualify for Agricultural Property Relief.

“Renewable energy projects, caravan sites, holiday cottages and liveries can result in a loss of APR. That is why careful Inheritance Tax planning should be undertaken if you decide to explore other ways of generating income.”

APR is only available for the agricultural value of land and property. However, the full market value of land can, in some circumstances, be considerably more than the agricultural value, especially where there is hope value, which means it has the potential for future development.

“This is not necessarily a problem for land which is farmed by the owner as Business Property Relief may be available for the increased value,” says Vanessa. “However, where land is let under a farm tenancy, Business Property Relief may not be available.”

The firm also warns farmers to be aware of how retirement could affect their eligibility for claiming APR on their home. “There have been numerous tax cases in recent years in which HMRC has sought to disallow APR on farmhouses,” explains Vanessa. “HMRC will scrutinise the nature, size and character of the house, and the amount of land being farmed. They will also look at whether or not the farming business is being controlled and managed from the farmhouse. This final point can be a problem for older farmers as HMRC may suggest that the farmhouse is lived in by a retired farmer, so not being used to manage the farm and its operations.

“Agriculture Property Relief can cause confusion because it is not always clear which buildings will qualify. It is important to never assume that it will be available for all of your agricultural assets. We always recommend that our farming clients undertake an inheritance tax review, to ensure that careful planning on their estate is carried out. This is likely to be especially important to farmers who are investigating new revenue streams in the lead up to Brexit.”