Diversifying a farm business – some key considerations

In a bid to increase their profits and create some financial stability, more and more farmers are looking at diversifying their agricultural and farming activities. This comes after Brexit where previous EU farming subsidies have become uncertain, and many farmers are struggling to forecast their future income.

Between 2021 and 2022, 68% of farm businesses in England had some diversified activity. With several ways to do so, diversification is increasingly popular within the agricultural sector.

Before taking steps to diversify your farm business there are some key considerations to think about first…

Diversifying a farm business

Farm diversification is the way in which a farm diverts away from traditional agricultural and farming activities to new or different activities that will help to generate profit. This could be investing in innovative practices or establishing activities and lines of business that are non-agricultural in nature.

There are various ways to diversify a farm and that’s part of what makes it such an appealing process. You can continue to run your farm business in the way that best reflects you and your day-to-day lifestyle.

You could develop a new enterprise using the land on which your farm sits. For example, creating camping or glamping sites to allow guests who want to get in touch with nature to stay on the farm.

It could also be sporting activities such as adrenaline courses or water sports if you have a body of water on your farm’s land. Leisure and recreational activities can also help to diversify a farm, for example, a petting zoo for children or an outdoor yoga class for adults to relax.

Developing the farm itself and your farm buildings can also be a good way to diversify. In converting or refurbishing properties, you can then go on to use them for holiday lettings, wedding venues or even offices and manufacturing spaces. This would help to provide extra income all year round.

If you’re not looking to venture into the hospitality or recreational side of diversification, you can also add value to your farm’s produce by creating a farm shop or selling to online markets. Whether you have a farm shop on the premises which you promote online, your own website to sell the produce on or an agreement to sell online with other companies, this can help both spread the word about your farm and create a solid stream of income.

Another way to diversify a farm business comes from investing in renewable energy. This can go back into the running of the farm or create further investment opportunities externally.

Key considerations when diversifying a farm

If you are exploring the options to diversify, then there are plenty of things to consider first. Planning ahead and fully considering both the advantages and disadvantages to the business is essential to the success of diversifying a farm business.

Property, industry, and people

One of the key considerations you need to make includes which property assets are available on the farm. For example, this will not only include any buildings, sheds, or stables, but other areas of value. This could be lakes, ponds, or forests to name a few. Identifying these will help you to make the most of your farm land and help you to plan for diversifying.

If you are considering diversifying into the hospitality or leisure industry, you must first think about whether it’s right for the community in which you live and work. For example, is there a market for it and can the local area withstand an influx of tourism?

You must then also consider the people who will be involved. Do you, your family, and other farm workers have the vital people and customer service skills needed for interacting with the public? Or will diversifying require upskilling or hiring extra pairs of hands?

Investment, risk, law, and taxes

If capital investment is going to be required to begin the diversification process, where will this come from? Planning is essential to coming up with estimated numbers, so you can explore your funding options or savings.

A good plan for diversification will also consider potential risks. This will include not only risks to the potential business, but also aspects such as health and safety and the resulting insurance implications.

You need to consider all the relevant laws and the planning requirements that come with diversifying too. For example, if you need to build roads, pathways or make renovations to a stable, is planning permission required? What are the legalities associated with having guests stay on the property, for example?

Finally, consider the impact that diversifying will have on income tax, VAT, and capital taxes. Although there are several benefits to diversification, you need to be aware of the impact this has on your taxes — whether that is for VAT, income tax or future reliefs from Inheritance Tax or Capital Gains.

As things stand, land that is owned and used within your farming business may qualify for both Agricultural Property Relief (APR) and Business Relief (BR) for Inheritance Tax (IHT) purposes. This means that it could pass on to future generations free of IHT. These reliefs may be lost following any diversification or change of use. There may also be a loss of Rollover or Holdover relief which defers when Capital Gains Tax is paid.

Westcotts

If you are looking to diversify your farm business, then Westcotts can help. We can discuss the implications this may have on your circumstances and run through some solutions we may have concerning the tax issues raised above. Get in touch today via the contact page on our website if you would like more help and advice.