Farm diversification: the tax implications

Q: What does this look like on a real farm?

Illustration only. A sole trader dairy farmer with farming turnover of £300,000, already VAT registered, converts a redundant barn into two holiday cottages and lets five stables on a DIY livery basis. Income tax: the cottages and the DIY livery rents are property business income, not part of the farming trade, so they cannot be averaged with farm profits. VAT: the cottage income is standard rated; the DIY livery is exempt unless the farmer has opted to tax, which may bring partial exemption into play. Business rates: the converted barn is no longer an exempt agricultural building, so the VOA may assess it. Inheritance tax: the barn and stables drop out of APR, and on HMRC's view are likely to be investment assets outside BPR.

A diversified venture on a farm is usually taxed as something other than farming: a separate trade, or a property business if buildings or fields are let out. That can take the asset out of agricultural property relief, may not bring business property relief in its place, adds to VAT turnover, and turns otherwise exempt farm buildings into premises that pay business rates.

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Is a new venture part of the farming trade for income tax?

Farming has a statutory definition. Section 9 of the Income Tax (Trading and Other Income) Act 2005, section 36 of the Corporation Tax Act 2009 and the definitions in ITA 2007 and CTA 2010 treat farming as the occupation of farmland wholly or mainly for the purposes of husbandry, excluding market gardening. HMRC’s Business Income Manual (BIM55051 and BIM55100) reads husbandry in its ordinary sense, such as growing crops and raising livestock, and requires a connection with occupying the ground that goes beyond simply using it as a site.

All farming in the UK is treated as a trade whether or not it is commercial (BIM55110), and all farming carried on by the same person in the same capacity is treated as one single trade (BIM55115). A diversified activity that is not husbandry sits outside that single trade. Running a café, a wedding venue or a paintball site is a separate trade, with its own profit computation. Letting converted barns as offices or workshops, or letting fields for others to use, is normally income of a property business instead.

This split decides which special rules apply. Profit averaging, the herd basis and the farming loss restriction are tied to the statutory definition of farming (BIM55051), so they apply to the farming trade only. See averaging for farmers for how that relief works.

What about holiday lets on the farm?

Converting cottages or barns into holiday lets is one of the most common diversifications. Until April 2025 qualifying furnished holiday lettings were treated as a trade for several purposes. HMRC’s Capital Gains Manual (CG73505) confirms that the special treatment no longer applies from 6 April 2025 (1 April 2025 for corporation tax), so a holiday let is now simply part of a property business. The consequences are covered in the abolition of the furnished holiday lettings regime.

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How are losses from a diversified activity treated?

Section 67 ITA 2007 denies sideways loss relief to a farming trade that has made a loss in each of the previous five tax years. BIM85620 confirms the rule applies only to farming and market gardening losses, and BIM85605 notes that carry forward against later profits of the same trade is not restricted. Because a diversified venture is a separate trade, its losses are judged under the normal loss rules, including the commerciality test.

What happens to agricultural property relief?

Agricultural property relief (APR) from inheritance tax needs two things: the property must be agricultural property, and it must be occupied for the purposes of agriculture. That occupation must have been by the owner for two years before the transfer, or by anyone for seven years where the owner held it throughout (IHTM24070). IHTM24060 tells HMRC officers to consider farmland, farmhouses, cottages and other buildings separately and to restrict relief where part of the property is not used for agriculture. A barn converted into a holiday let or an office no longer qualifies.

The same IHTM page notes that business property relief (BPR) will often be available as an alternative, but not where the business is wholly or mainly making or holding investments. HMRC’s view in IHTM25278, upheld by the Upper Tribunal in Pawson [2013] UKUT 50 (TCC), is that holiday lets will generally not qualify. IHTM25280 lists self storage, business parks, DIY livery and similar uses of property as activities that may be investment businesses. Facts do decide cases: in Vigne [2018] UKUT 0357 (TCC) the Upper Tribunal upheld a finding that a livery business with substantial services qualified for BPR.

From 6 April 2026, 100% relief applies only to the first £2.5 million of combined property qualifying for 100% APR or BPR, with 50% relief above that. Any unused allowance can pass to a surviving spouse or civil partner, and tax on qualifying property can be paid in interest free instalments over 10 years. See agricultural property relief and business relief for the detailed conditions.

How does diversification affect VAT?

VAT registers the person, not the business. HMRC’s VAT Registration Manual (VATREG02200) says a trader must take into account all their business activities, so a farmer’s diversified income counts towards the same £90,000 registration threshold as the farm. See one VAT registration for sole traders.

Farmers using the agricultural flat rate scheme need particular care. VAT Notice 700/46 (sections 4.1 to 4.4) says a flat rate farmer may stay in the scheme while non farming turnover, such as bed and breakfast, farm visits or riding lessons, is below the VAT registration threshold, but cannot charge VAT or the flat rate addition on it. Once non farming turnover goes over the threshold the farmer must leave the scheme and register. A separately owned partnership or company can register for the non farming business instead.

Liability of common diversified supplies

Holiday accommodation is standard rated whatever the length of stay (VAT Notice 709/3, paragraph 5.2).
Stabling where an owner gets exclusive use is an exempt right over property unless the farmer has opted to tax; livery services going beyond that, such as feeding and mucking out, are standard rated unless the package is attached to exempt stabling, and are always standard rated from special purpose stables (VAT Notice 701/15, section 10).
Letting buildings is generally exempt unless the option to tax is made.

Exempt lettings alongside taxable farming can restrict input tax recovery under partial exemption.

Do diversified buildings pay business rates?

Agricultural premises are exempt from non domestic rates under Schedule 5 to the Local Government Finance Act 1988. The Valuation Office Agency’s rating manual on farm diversification says any non domestic use within the farm that does not fall within that exemption will be rateable. Where the farmer runs the activity, the whole farm is entered in the rating list as “part exempt”. Where a separate trading company runs it, only the area it occupies forms the rateable property. One off events are unlikely to be assessed, but repeated or substantial use, such as an annual festival, can be. How rates are then calculated is explained in business rates explained.

What does this look like on a real farm?

Illustration only. A sole trader dairy farmer with farming turnover of £300,000, already VAT registered, converts a redundant barn into two holiday cottages and lets five stables on a DIY livery basis.

Income tax: the cottages and the DIY livery rents are property business income, not part of the farming trade, so they cannot be averaged with farm profits.
VAT: the cottage income is standard rated; the DIY livery is exempt unless the farmer has opted to tax, which may bring partial exemption into play.
Business rates: the converted barn is no longer an exempt agricultural building, so the VOA may assess it.
Inheritance tax: the barn and stables drop out of APR, and on HMRC’s view are likely to be investment assets outside BPR.

What mistakes come up most often?

Assuming every activity on the farm is part of the farming trade and putting diversified income through the farm accounts without a separate computation.
Forgetting that a flat rate farmer’s non farming turnover is monitored against the VAT threshold.
Relying on APR for a converted building, or on BPR for a letting business, without testing whether the activity is mainly investment.
Treating holiday lets as a trade after 6 April 2025.
Overlooking that a converted building, or a field used repeatedly for events, can become rateable even though the rest of the farm stays exempt.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.