FARMERS are being warned they could be faced with hefty inheritance tax bills if they pursue diversification projects.

Agricultural law specialists at Latimer Hinks Solicitors have urged farmers to be aware that changing the use of farm land could nullify their exemptions from inheritance tax.

Many farmers have already chosen to boost their income by diversifying their businesses due to higher production costs and lower product prices.

Typical diversification projects include converting under-used or redundant buildings to provide residential property or business premises, as well as wind farms, children's nurseries, farm shops and liveries.

Legal problems can arise because if farm land is adapted for different purposes, it may affect the farmer's entitlement to Agricultural Property Relief (APR).

Anne Elliott, partner and agricultural law specialist at Darlington-based Latimer Hinks, said: "While APR means owners of agricultural property may qualify for 100 per cent relief from Inheritance Tax (IHT), it comes with conditions.

"One of these is that the land must meet the IHT definition of agricultural property and be occupied for agricultural purposes. Changing its use can affect land owners' entitlement to APR.

"There are also important rules regarding not only the occupation but the length of ownership of the property.

"Farmers and land owners who have decided to change, or are considering changing, the use of their land, should be aware that they can lose APR.

"If they do so, to mitigate IHT, they must try and ensure that they qualify for the alternative, Business Property Relief (BPR).

"Diversification can be a huge boost for farmers, but there can be pitfalls when it comes to retaining and ensuring eligibility for APR; or failing APR, for BPR.

"With the right advice and careful planning, problems and, potentially loss of these immensely valuable reliefs, can be avoided."