Farm Diversification UK — Planning, Tax, FHL Abolition, and IHT Agricultural Property Relief

Planning for Farm Diversification — Prior Approval and Full Permission

The permitted development rights that allow farm buildings to be converted to residential and holiday accommodation without full planning permission are among the most significant planning tools available to farm diversifiers: (a) Class Q — agricultural buildings to residential: GPDO 2015 Schedule 2 Part 3 Class Q permits the change of use of an agricultural building (within an agricultural unit that has been used for agricultural purposes for at least 10 years before the date of the application) to a dwelling house (Use Class C3); the agricultural unit must have been in agricultural use before 20 March 2013 (or immediately before the change of use if earlier); the permitted development allows up to 5 dwellings per agricultural unit, with a total floor area cap of 1,000 sq m; Class Q requires prior approval from the LPA in relation to transport impacts, contamination, flooding, and design and external appearance; the principle that the operation must be a 'conversion not a rebuild' (Hirose Electrical UK Ltd v Secretary of State [2021]) means that the structural integrity of the existing building must be largely preserved — wholesale demolition and reconstruction is not Class Q development; (b) Class QB — agricultural buildings to flexible commercial use: Class QB (introduced 2024) permits the change of use of an agricultural building to a 'flexible commercial use' (Class E — commercial, service, and industry) without prior approval, subject to a 500 sq m floor area cap; Class QB allows farm buildings to be converted to offices, light industrial units, or retail uses; (c) Glamping and campsites: pitching tents or placing caravans on agricultural land for short periods (not exceeding 28 days in a calendar year) is permitted development under Part 4 Class B — no planning permission is required for small-scale temporary use; longer-term or permanent glamping developments (shepherd huts; safari tents; yurts with hardstanding) typically require full planning permission — use is C3 (dwelling) or sui generis depending on the nature and degree of permanence; (d) Equestrian development: change of use from agricultural to equestrian (keeping horses for leisure rather than farming) requires planning permission; the LPA must be satisfied that the use is genuinely equestrian and not a disguised residential development; ancillary development (stables; menage; hay barn) also typically requires planning permission; (e) Farm shops and visitor attractions: change of use from agricultural to retail (A1/E) requires planning permission; the LPA considers the impact on the local retail hierarchy; permitted development rights under Part 3 Class R (agricultural buildings to flexible commercial use) may be available for buildings with a prior agricultural use.

• Class Q: up to 5 dwellings per agricultural unit; 1,000 sq m total; 10-year prior agricultural use; conversion not rebuild (Hirose [2021]); prior approval required
• Class QB (2024): change of use to Class E commercial without prior approval; 500 sq m cap; no conversion/rebuild limitation — allows internal fit-out for offices, workshops, or retail
• 28-day temporary use: pitching tents or placing caravans for up to 28 days in a calendar year is permitted development; no planning permission required for low-intensity seasonal glamping
• Equestrian: change of use from agricultural to equestrian requires full planning permission; leisure horse keeping is not 'agriculture' for planning purposes under TCPA 1990 s.336
• Permanent glamping (shepherd huts; yurts on hardstanding): typically requires full planning permission; use class depends on degree of permanence and sleeping facilities provided

FHL Abolition from April 2025 — Impact on Farm Diversification Holiday Lets

The Furnished Holiday Let (FHL) regime was abolished with effect from 6 April 2025 (Finance (No.2) Act 2023 as amended). Farm conversions and diversified holiday accommodation that previously qualified as FHL businesses now lose the specific tax advantages that made FHL investment attractive: (a) Capital Gains Tax — loss of BADR and rollover relief: FHL properties previously qualified as 'business assets' for Business Asset Disposal Relief (BADR) — the effective CGT rate on disposal was 10% (up to the lifetime allowance). From April 2025, FHL properties are treated as investment properties on disposal and BADR is unavailable; CGT is charged at 24% on residential property gains. FHL properties also previously qualified for Business Asset Roll-Over Relief under TCGA 1992 ss.152-158 (reinvestment of sale proceeds in another qualifying business asset to defer CGT). Roll-over relief is no longer available on FHL disposals after April 2025; (b) Income tax — loss of pension contribution eligibility: FHL income previously counted as 'relevant UK earnings' for pension contribution purposes — allowing higher pension contributions and tax relief. From April 2025, FHL income is treated as passive property investment income and no longer counts as relevant earnings; pension contribution relief is restricted to earned income only; (c) Section 24 mortgage interest restriction now applies: previously FHL income was outside Section 24 (the restriction of mortgage interest relief to basic rate for residential landlords). From April 2025, FHL income is subject to the Section 24 restriction — higher-rate taxpaying farm diversifiers with mortgaged holiday lets now receive only basic-rate (20%) income tax relief on finance costs; (d) Capital allowances — transitional rules: FHL businesses could claim capital allowances on furniture, equipment, and fixtures (plant and machinery). From April 2025, the replacement domestic items relief (RDIR) applies to holiday lets as it does to residential lets; capital allowances on qualifying integral features may still be available in some circumstances; (e) Continued tax treatment now aligned with standard investment property: holiday let income is taxed as property business income; losses are ring-fenced to the property business; all income and expenditure is reported on the UK Property pages of the self-assessment return.

• FHL abolished April 2025: farm diversification holiday accommodation is now ordinary property investment; no special CGT or income tax treatment
• BADR lost: no longer available on FHL disposals; CGT at 24% on residential property gains (not 10% with BADR)
• Rollover relief lost: FHL proceeds can no longer be reinvested in another business asset to defer CGT; gain is chargeable on disposal
• Section 24 now applies: mortgage interest on holiday let finance restricted to basic-rate relief for higher-rate taxpayers — costs have risen significantly for leveraged farm holiday lets
• Pension contributions: FHL income no longer counts as relevant UK earnings; higher pension contributions funded by FHL profits are no longer permitted after April 2025

IHT Agricultural Property Relief on Diversified Farm Land

Agricultural Property Relief (APR) under IHTA 1984 ss.115-124 provides 100% inheritance tax relief on the 'agricultural value' of qualifying agricultural property (broadly, land occupied for the purposes of agriculture, including crops and livestock — s.115(2)). The interaction of APR with farm diversification creates a critical planning issue: (a) The agricultural use requirement: land that has been taken out of agricultural use for diversification (e.g. for glamping, equestrian, commercial letting) ceases to satisfy the agricultural use requirement and loses APR eligibility — the land becomes a potentially exempt transfer or a chargeable transfer on death at 40% IHT; the test is whether the land was 'occupied for the purposes of agriculture' immediately before the transfer; (b) The '2-year/7-year' ownership tests: APR requires the landowner to have either (i) occupied the land for agricultural purposes for 2 years immediately before the transfer, or (ii) owned the land for 7 years during which it was occupied for agricultural purposes by the owner or another person; where the land was agricultural for 7 years but has been diversified for 2 years immediately before death, APR may still be available if the 7-year ownership test is satisfied — HMRC applies this strictly; (c) The development value trap: where planning permission for residential development has been granted (or is anticipated) on agricultural land, the 'development value' of the land exceeds its 'agricultural value'; APR applies only to the agricultural value — the development uplift is exposed to IHT at 40%; significant farm estates with hope value or planning permission should consider the IHT implications at the earliest opportunity; (d) Business Property Relief as an alternative: where APR is unavailable (because the land is not being farmed), Business Property Relief (BPR) under IHTA 1984 ss.103-114 may be available if the diversification activity constitutes a 'business' and the activities are trading rather than investment; passive letting of farm buildings or land (without active management) is investment, not trading — BPR is unavailable; active glamping businesses, equestrian centres, and farm shops with significant trading activity may qualify for BPR; (e) Autumn Budget 2024 — APR and BPR reforms: the October 2024 Budget announced that from April 2026, 100% relief (APR and BPR) will be limited to the first £1 million of qualifying assets; above £1 million, 50% relief applies (effective rate 20% IHT); the reform will significantly increase IHT liability for large farm estates and those with diversified income streams.

• APR requires agricultural use: land taken out of agriculture for diversification loses APR; the test is whether the land was occupied for agriculture immediately before the transfer/death
• Development value: APR applies only to agricultural value; planning permission or hope value creates an IHT-exposed premium above agricultural value
• BPR for active diversification businesses: glamping, farm shops, equestrian centres with active management may qualify for BPR; passive commercial letting does not qualify
• 7-year ownership test: APR can still apply if the land was agricultural for 7 years (even if recently diversified), but HMRC applies this strictly and may challenge recent diversification
• April 2026 reform: Budget 2024 — 100% APR/BPR capped at £1m from April 2026; 50% relief above £1m; significant planning opportunity before the reform takes effect

VAT on Farm Diversification and Conversion Projects

Farm diversification projects typically involve a mix of VAT-exempt, zero-rated, and standard-rated supplies, creating partial exemption and Capital Goods Scheme issues: (a) Agricultural land and buildings — VAT exempt by default: the letting or sale of agricultural land and buildings is VAT-exempt unless the seller or landlord has opted to tax (standard-rated the supply under VATA 1994 Sch.10); where a farm lets redundant buildings as workshops or offices, the letting is VAT-exempt by default and the farm cannot recover input VAT on conversion costs; (b) Option to tax on commercial lets: by opting to tax under VATA 1994 Sch.10, the farm makes its commercial lets of land and buildings standard-rated (20%) — enabling recovery of input VAT on construction and conversion costs; the option to tax is an irrevocable 20-year commitment; it cannot be applied to existing dwellings (the option to tax is automatically disapplied to dwellings for residential purposes); (c) New residential dwellings — zero-rated: the first grant of a major interest (freehold or lease of more than 21 years) in a new dwelling is zero-rated under VATA 1994 Sch.8 Group 5; Class Q conversions of farm buildings to dwellings: if the farm sells or grants a long lease of the newly converted dwelling, the sale or lease is zero-rated; this allows recovery of input VAT on the conversion costs (subject to partial exemption); (d) Holiday lets and VAT registration: where diversified holiday let income exceeds the VAT registration threshold (£90,000 from April 2024), the farm must register for VAT; holiday accommodation is standard-rated (20%) at the point of letting; the farm can recover input VAT on refurbishment and operating costs as a VAT-registered business; (e) Capital Goods Scheme: where a farm business claims input VAT on a conversion or refurbishment costing more than £250,000, the Capital Goods Scheme applies — HMRC requires an annual adjustment over 10 years (for land and buildings) if the use of the building changes (e.g. from taxable holiday let to exempt residential letting); (f) DIY housebuilder scheme: where the farm owner (not a business) converts a farm building under Class Q to their own private residence, the DIY housebuilder scheme under VATA 1994 s.35 allows a reclaim of VAT paid on building materials and services; the claim must be made within 6 months of completion of the conversion.

• Default VAT exemption on agricultural land/building lets: cannot recover input VAT on conversion costs without opting to tax
• Option to tax (Sch.10): irrevocable 20-year commitment; enables input VAT recovery on commercial conversion costs; cannot apply to dwellings
• Class Q residential sales — zero-rated: first grant of major interest in a new Class Q conversion is zero-rated; enables input VAT recovery on conversion costs
• VAT on holiday lets: standard-rated at 20%; register when turnover exceeds £90,000; enables input VAT recovery on refurbishment and operating costs
• Capital Goods Scheme: 10-year adjustment for buildings with input VAT recovery of £250,000+; use-changes trigger annual adjustments; plan exits before 10 years expire

Frequently asked questions