By Manon Williams Farmers are often being encouraged to diversify to make the most out of their businesses and resources and this is increasingly true in light of Brexit; however, thinking more long term, how many farmers have stopped to consider what effect such diversification could potentially have on their estates after death and the availability of Inheritance Tax?
One of the most common diversification projects for farmers are holiday lets due to the availability of outbuildings with development potential on farm. Holiday lets have been a continued source of dispute between HMRC and the taxpayer in terms of whether Business Property Relief (BPR) should be available to mitigate Inheritance Tax. As a rule of thumb, in the eyes of the revenue, assets which produce a rental income are deemed investment assets as opposed to business assets, and generally, the historic position has been that holiday lets would not qualify for BPR. This was demonstrated in the case of Ross v HMRC  where eight holiday cottages in Cornwall were let as self-catering lets. The owner had previously owned a nearby hotel, and so guests staying in the self-catering lets were able to take advantage of some of the hotel’s services such as having breakfast there. Guests at the self-catering lets were also offered a change of bedding and cottage clean during the week, and it was argued that the provision of these services meant that the lets were much more than investment assets – they were being run as a business and should therefore qualify for relief. However, the Tribunal did not agree with this view and denied the availability of BPR.
A further diversification often found on farms are liveries. Again, the historic position has been that BPR should not be available, as the land owner is simply giving horse owners the right to occupy a particular parcel of land.
More recently however, two cases have considered the position in relation to holiday lets and liveries, and the availability of BPR. The case of Vigne v HMRC , which considered liveries and BPR, found in favour of the taxpayer, confirming the view that where valuable services are being provided, this should be deemed a business asset as opposed to a business of ‘holding investments’. The services being provided by the deceased in this particular case included providing health checks for the horses, hay and worming products.
The very recent case of Graham v HMRC  considered whether BPR should be available to holiday lets where there were significant additional services being offered, such as providing barbeques and cream teas for guests, collecting groceries and fresh produce on behalf of guests, providing welcome packs and basic supplies for each guest, providing a taxi service in emergencies as well as leisure facilities such as a swimming pool and games room. The Tribunal noted that some of these services were investment activities, but there was also significant non-investment activity, i.e. activities which were representative of a business. BPR was therefore granted.
It is important to note that HMRC are currently appealing the Vigne decision and it is expected that they may also appeal the Graham decision, and so the outcome may potentially change in future. The courts will consider each case on its own facts and farmers who have diversified are encouraged to seek advice in relation to their own positions if they are concerned. For further information, please contact a member of our private client team on 01558 650381.