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Tax implications of converting Farm buildings

By Ensors Team
23rd Dec 2021

The RPA has commenced the distribution of the 2021 Basic Payment Scheme (BPS) payments, but it will not have escaped notice that the payments have decreased (with 2021 being the first year of the phased reductions) thus bringing a stark reminder to agricultural businesses that the phasing out will undoubtedly leave what may be a significant hole in the business finances.

Several farming businesses have been looking to remedy this by diversifying their activities; one particular route is supplying holiday accommodation, the simplest form being providing facilities for camping, but some businesses have been considering the more significant route of converting unused or dilapidated farm buildings into luxury holiday accommodation. Where the conversion route is being taken, this can have significant repercussions from a tax perspective, and I would strongly advise proper consideration in advance of any conversion works taking place.

How will the costs be treated for tax purposes? The poignant element to this is repairs attract full tax relief in the year of expenditure, whereas capital costs would be subject to capital allowance rules and may get no relief at all until the building is sold. The natural reaction is a large proportion would be repairs of the existing building with only the alteration works being treated as capital. However, a change to the overall character/usage of a building would likely be regarded as capital expenditure with very little cost allowable as repairs. The action of undertaking significant works to renovate a building in one go may further support the costs being treated as capital rather than repairs.

VAT should not be forgotten! Can VAT be recovered on the renovation costs? Does VAT need to be charged on the rentals? Unfortunately, the answer is, it depends!

Another tax consideration is the effect of the change of use of the building, such that if it is no longer used as an asset of the farming trade it may no longer qualify for certain reliefs under Inheritance Tax rules, specifically Agricultural Property Relief or Business Property Relief.

No two farming businesses are the same and one size most certainly does not fit all, so seek professional advice specific to your circumstances.