17 March 2017

Diversifying income streams in farms and estates

Due to fluctuating commodity prices, farms and estates are increasingly considering new sources of income streams in order to continue their success.

It’s fair to say that many farms and estates have changed quite dramatically over the past few years, with many owners having to think about how to make the land work in more diverse ways. There will always be a fundamental need to produce food stuffs, however, fluctuating commodity prices have increased the demand for other income streams that will ensure the continued success of the farm or estate.

Some farms and estates have exploited the sporting potential of their land, offering long-standing activities such as shooting, stalking and fishing. Whilst these remain popular pursuits, it’s important to question just how profitable they are. To make them particularly attractive it is often necessary to build a package, which might include accommodation, meals, transport and access to expert tuition. HM Revenue & Customs will look at the ancillary services provided to determine whether the sporting activities amount to a trade or simply the use of land, which is important from a tax perspective.

Other popular income streams come from renting out cottages and furnished holiday lets. As many property owners will be aware, this asset class has come in for some harsh legislative tax changes over the past few years. More change is on the way from 6 April 2017, with restrictions in respect of the deduction for mortgage interest. In addition, furnished properties no longer qualify for wear and tear allowance, which allowed a deduction for 10% of net rents. The qualifying periods for furnished holiday lets have also increased, with properties now requiring to be available for 210 days and let for 105 days. Again, there is a question over how profitable this line of business is. With so much competition, it can be challenging to set the rent at the right level. Costs can also escalate as owners try to make their properties more attractive than their competitors.

So what other avenues could farmers and landowners explore? A farm shop selling fresh local produce still attracts a great many visitors, particularly if combined with a tea room and the opportunity to sample some of the goods. Other sporting activities, such as the ability to cycle around an area of the land or even more extreme mountain biking pursuits, are increasing in popularity. These, however, do bring their own challenges, for example ensuring people are available to manage and supervise the activity and taking into account any health and safety and insurance requirements.

Other areas to consider might focus on renewable energy. Whilst onshore wind is not as lucrative as it once was, there are other types of renewable energy which still offer the possibility of bringing in much needed income. For some landowners this could involve installing a hydro scheme, and for others it might be biomass. Particularly for landowners with forests on their land, the possibility of producing wood pellets means that, in the long run, there will be savings to be made in fuel bills. Whilst such projects tend to be capital intensive, particularly early on, the benefits over time can be considerable.

Introducing a new source of income is often a major undertaking for a farm or estate and there is no easy way to decide which form of diversification will give the best result. Any impact on the family or the wider community needs to be explored, understood and managed. Financial and time implications also need to be taken on board to give the project the best chance of success. Quite often, the lead may come from the next generation, who are sometimes more modern and innovative in their approach to these matters. At other times, it may come from the community, driven by a desire to see a new amenity for them to use. The key to any diversification project, however, is sound, thorough planning from the outset, and a strong belief that it will succeed!

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