What are the tax implications of converting barns?
The tax implications will depend on whether the barn is to be sold with planning permission or developed by the business. If the latter, the intended use of the barn once converted will make a difference to the tax implications. Assuming the barn is to be sold with planning permission, there will be a tax charge on the difference between the sale value and acquisition value. The difference will be chargeable to capital gains tax (CGT) at 10% or 20%, depending on whether the owner has utilised their basic rate band for income tax purposes. Every individual has a CGT annual exemption of £11,100, so savings can be made if the property is in both spouses’ names. In addition, if there are farm losses these can be used to offset the capital gain. Where the capital gain is substantial further tax planning can be done by gifting shares to other parties before planning permission and while the barn is used for agricultural purposes. In addition rollover relief can be used if the proceeds from the sale are reinvested in other qualifying assets. Finally, where a large proportion of the gain is likely to be taxed at 20%, consideration should be given to whether entrepreneurs’ relief (ER) can apply. ER can half the tax bill but needs careful planning in advance of the sale.
If the barn is to be developed by the business, the main tax cost of the development will be VAT. The rate of VAT and the amount of VAT that can be reclaimed will depend on the intended use of the barn once developed. For example, at first sight, the VAT rate that should be applied by a contractor on his invoices for converting a non-residential barn into a single house or a number of houses should be at the reduced rate of 5%. However, where there is a restriction to the planning permission such that the barn cannot be sold separately to the rest of the farm, the standard rate of VAT of 20% will apply. In addition, the DIY house builder’s scheme cannot be used to recover the VAT charged. Therefore it is important to take advice to ensure you benefit from the reduced rate of VAT. Where VAT is charged it can be reclaimed if the barn is to be occupied by a farmworker. A partial reclaim can be made if it is to be occupied as a farmhouse by the business owner. In addition if the converted barn is to be used as holiday accommodation then VAT is recoverable, although VAT will need to be charged and paid over to H M Revenue and Customs on the holiday letting income. Finally, the do-it-yourself house builder and converter’s scheme allows VAT recovery where the house is to be occupied by the owner or a member of the owner’s family, assuming there are no planning restrictions as mentioned above. If the barn is to be rented out, the recovery of VAT will be more complicated. Unless the costs fall within partial exemption limits the VAT is unlikely to be recoverable.
Another important area when converting a property for use in the business is capital allowances. If the barn is to be occupied by a farmworker, or used for holiday accommodation, relief will be available for the cost of plant and machinery and integral features in the building. This will include kitchen and bathroom fittings as well as internal electrics, heating and plumbing among other costs. Where the business converts a barn with a view to selling it on, the gain will be chargeable to income tax rather than capital gains tax. As a result the tax payable will be a lot more. The treatment of the sale and the associated conversion costs for VAT purposes will depend on the planning permission. In either case advice should be taken to ensure the correct business structure is put in place to undertake this activity.
This article originally appeared in the December 2016 issue of the Dairy Farmer Magazine.