Farm diversification can provide valuable new income streams for farming businesses, but changing how agricultural land or farm buildings are used may affect Agricultural Property Relief (APR) and Business Property Relief (BPR). The inheritance tax implications should be reviewed before projects begin.
This does not mean diversification should be avoided. However, reviewing the tax position at an early stage can reduce the risk of unintended consequences and help align the project with wider succession plans.
How can farm diversification affect inheritance tax?
APR and BPR can reduce the value on which inheritance tax (IHT) is calculated when the relevant conditions are met.
APR applies to qualifying agricultural property and is generally limited to its agricultural value. BPR applies to qualifying business property and may be relevant where APR is unavailable or does not cover the full value.
Since 6 April 2026, the availability of 100% APR and BPR is subject to a combined £2.5 million allowance for qualifying agricultural and business property, with qualifying value above this amount generally qualifying for relief at 50%, although the detailed operation of the rules can be more complex in practice.
While these changes mean the reliefs are no longer as generous as they once were, they can still significantly reduce the IHT payable on many estates. Preserving relief where it’s available therefore remains an important consideration when reviewing diversification opportunities.
Whether either relief is available will depend on the particular facts and how the diversification activity is carried on.
For more information on these reliefs see our articles Agricultural Property Relief and Business Property Relief.
When can diversification affect APR?
Land or buildings may cease to qualify for APR if they are no longer being used for agricultural purposes. Land used for commercial, leisure or energy generation activities may not qualify for relief in the same way as land used for farming.Â
Why can rental activity affect BPR?
Broadly, BPR is not available for businesses that consist wholly or mainly of making or holding investments. Activities that generate rental income can therefore create difficulties, particularly where investment activities become a substantial part of the overall estate.
The position is not always straightforward and the same activity can produce different outcomes depending on how it is structured and operated. A business involving active management and the provision of services may be viewed differently from one that simply receives rental income.
How is the wider estate assessed for BPR?
Many landed estates comprise a mixture of farming, property and other income-generating activities.
The balance between trading and investment activity can affect whether BPR is available across a diversified estate. Relevant factors include the overall context, capital employed, staff time, turnover and profit. These factors must be considered when assessing the overall business.
The Balfour case, and many others, illustrate how this whole-business assessment may apply to an estate with several income streams. It also demonstrates why the nature and relative significance of the estate’s different activities must be considered together.
A diversified activity will not necessarily jeopardise BPR. However, if investment activities become too significant in comparison with the estate’s trading operations, the availability of BPR may be affected.
Tax considerations for common diversification projects
Common farm diversification projects include renewable energy developments, commercial uses of farm buildings, environmental schemes and visitor businesses.
The following examples illustrate common issues only. The tax position will depend on the ownership structure, contractual arrangements, activities undertaken and circumstances of the wider business.
Renewable energy projects
Renewable energy projects can provide a valuable and predictable income stream for landowners.
However, where land is leased to a third-party operator for solar panels, wind turbines or battery storage facilities, the income will often be rental in nature. This can affect both APR and BPR.
Continuing an agricultural activity, such as grazing livestock around solar installations, does not necessarily preserve APR or BPR. The IHT position will depend on the arrangements and the extent of the landowner’s involvement, so it should be reviewed before entering into an option agreement, lease or other long-term commitment.
Given the significant capital values often involved, the IHT consequences can be substantial if reliefs are lost.
Shoots
Commercial shoots continue to be an important source of diversified income for many estates.
Where a shoot is run on a genuinely commercial basis with a view to profit, BPR may be available. However, care should be taken where the activity includes a significant private or recreational element, as this may affect the analysis.
Shoot activities should also be considered within the context of the estate as a whole, particularly where BPR is being relied upon across a broader rural business.
Holiday accommodation and visitor businesses
Many farms and estates have diversified into holiday accommodation, glamping sites, farm parks and other visitor attractions.
The tax treatment depends on how the business operates. The level of services provided to guests is often an important factor when considering the availability of BPR. An actively managed visitor business providing substantial services may be treated differently from an arrangement that primarily generates rental income.
Commercial lets and converted farm buildings
The conversion of farm buildings into offices, workshops, storage facilities or other commercial premises remains a popular diversification strategy.
Commercial lets can provide reliable income, but rental activity may alter the balance between trading and investment across the wider estate.
Woodland and forestry
Commercial forestry and woodland management can form an important part of a diversified rural business.
Where woodland is managed commercially with a view to profit, BPR may be available, but the position will depend on the extent and nature of the woodland activities being undertaken. Woodland that is ancillary to agricultural land may also qualify for APR in certain circumstances.
However, where neighbouring land moves out of agricultural use as part of a diversification project, the availability of APR on associated woodland should be reviewed to ensure relief has not been inadvertently affected.
For more information, see our guide to the tax treatment of commercial woodland.
Environmental schemes
Environmental schemes are becoming an increasingly important source of income for landowners. Some schemes may support the availability of Agricultural Property Relief (APR), but the position will depend on the nature of the agreement and the land involved.
Not all environmental arrangements are treated in the same way. Projects involving biodiversity net gain (BNG), carbon markets, nutrient neutrality and other environmental schemes can each produce different outcomes depending on the underlying arrangements and activities being undertaken, so landowners should avoid assuming that land managed for environmental purposes will automatically qualify for APR.
Environmental projects can also raise wider questions about Business Property Relief (BPR), particularly where significant areas of land move away from conventional agricultural production. The impact on the wider business should be considered before entering into a long-term agreement.
For more information, see our guidance on the taxation of ecosystem service payments and natural capital projects.
How can diversification affect succession planning?
Diversification can change the use, value and tax treatment of agricultural land, farm buildings and other estate property. In many cases, it raises broader succession-planning questions beyond inheritance tax alone. Projects may create new assets, income streams or ownership considerations, making it important to review existing structures, including partnerships, trusts and wills, to ensure they remain aligned with the family’s objectives and the future direction of the business.
Questions to consider before starting a diversification project
Before proceeding with a diversification project, landowners should consider:
- Will the land or buildings remain in qualifying agricultural use?
- Will the activity be operated by the landowner or leased to another party?
- Could BPR be available?
- How will the activity affect the overall trading profile of the farm or estate?
- Are the existing ownership and business structures still appropriate?
- How could the project affect the estate’s succession plans?
- Has the tax position been reviewed before any long-term agreement is signed?
 How Saffery can help
A farm diversification project can affect both the tax treatment of individual assets and the trading profile of the wider business. Reviewing the inheritance tax and succession-planning implications before agreeing a lease, option agreement or other long-term commitment may provide more scope to choose an appropriate structure.
If you’re planning a farm or land diversification project, or reviewing an existing activity, speak to your usual Saffery contact or use the get in touch form to contact one of our land and rural specialists.
