Farm diversification can affect your tax position in different ways depending on whether the new activity counts as farming, a different type of trading, or investment. Diversification into further agricultural related activities typically leaves your tax and VAT position unchanged, while moving into rental, renewables, or new commercial ventures may create separate trades or investment activities, change VAT recovery, or impact valuable Inheritance Tax and Capital Gains Tax reliefs. Understanding the impact of your new activity on your overall tax position is critical before you proceed.
Diversification into other farming activities
If your business diversifies into other agricultural activities—for example, moving from arable farming to poultry—there is usually little or no change in your tax position.
- All farming income is generally treated as one trade for tax purposes.
- Your VAT treatment essentially remains the same.
- Key reliefs such as Inheritance Tax (IHT) reliefs and Capital Gains Tax (CGT) reliefs are unlikely to be affected.
This type of diversification typically carries the lowest tax risk.
Diversification into investment activities
If diversification introduces investment-based income, such as property rental, the tax landscape changes more significantly.
- Rental profits are treated as a separate property business which follows different Tax rules.
- Rental income is exempt from VAT unless overridden by an effective option to tax – exempt income can restrict the amount of input VAT you can reclaim on general expenses.
- You may lose access to Agricultural Property Relief (APR) and Business Property Relief (BPR) on or all some assets if the overall business is no longer considered “wholly or mainly trading.”
- If the investment activity becomes larger than the farming trade, you may need to restructure to protect valuable IHT and CGT reliefs linked to farming assets.
This area of diversification carries a higher risk of losing existing tax advantages.
Diversification into renewable energy
Renewable energy projects can be attractive, especially where capital allowances apply.
- Some projects qualify for capital allowances at 6%, 18%, or 100%, helping reduce taxable profits.
- If the energy generated is used on the farm, your IHT and CGT reliefs generally remain secure.
- If the energy is sold externally, the activity may be viewed as an investment, potentially restricting reliefs in a similar way to rental activities.
Correct classification of the activity is essential to safeguard tax reliefs.
Diversification into new trading activities
Launching a new commercial trade—for example, selling products, offering services, or running an onsite shop—can also affect your tax position.
- Profits from the new activity are treated as a separate trade.
- This may impact loss relief and can complicate farmers’ averaging claims.
- For IHT purposes, BPR can apply to assets used in the new trade without affecting APR on existing farming assets.
This type of diversification can be beneficial but requires careful tax planning.
Risk, structure and legal considerations
Diversification often changes your risk profile, especially when moving into activities with public access, higher liabilities, or unfamiliar operating models.
You may wish to:
- Set up a separate legal entity
- Use limited liability to protect core farming assets
- Review insurance, governance and compliance requirements
This can help ringfence your traditional farming trade from new risks.
Why professional advice is essential
Farm diversification can affect multiple areas of tax at once—Income Tax, VAT, CGT, IHT and capital allowances. Speaking with a specialist before committing to any new venture can help you:
- Correctly classify the new activity
- Maintain reliefs where possible
- Avoid adverse VAT consequences
- Structure diversification efficiently
- Reduce exposure to financial and legal risks
On 6 May 2026 our property tax specialists and Birketts LLP are hosting a breakfast seminar at the Møller Institute. Together, we’ll explore the diverse challenges faced by landowners with varying tax profiles and explore emerging opportunities in the commercial real estate market. Book your place now.
